The Bankruptcy Means Test

The bankruptcy means test is an objective way to weigh whether a debtor qualifies for bankruptcy under Chapter 7.

Old bankruptcy law often made it relatively easy for filers to meet the criteria because bankruptcy courts used considerable discretion in determining eligibility.

However, Congress passed the Bankruptcy Protection Act of 2005 to counteract the effects of lenient and inconsistent standards. As a result, most filers must now pass the bankruptcy means test to qualify for Chapter 7 bankruptcy.

Debtors Eligible to Bypass the Means Test

The bankruptcy means test does not apply to disabled veterans that took on debt while:

• On active duty
• Serving in homeland defense activities

This exclusion applies as long as:

• The veteran's disability rating is at least 30%
• More than half of the debt was acquired during active military duty or during service for homeland defense

If a filer's debts came mostly from operating a business, the bankruptcy means test is inapplicable and the debtor may file for bankruptcy under Chapter 7.

Step 1: Comparing Income to State Averages

The first part of the Means Test compares:

• Your average monthly income for six months before filing for bankruptcy
• Your state's median family income

If a debtor's income is less than or equal to the state median, they can file for Chapter 7.

There is still a chance a bankruptcy trustee may later determine you have enough income (after paying allowable expenses) to repay creditors in a Chapter 13 repayment plan. The Means Test is not a final “yes.”

The bankruptcy court will convert the Chapter 7 bankruptcy to a Chapter 13 bankruptcy if it agrees with the trustee.

The income calculation should include the following sources:

• Wages, salary, tips, bonuses, overtime, and commissions
• Gross income from a business, profession, or a farm
• Interest, dividends, and royalties
• Rental and real property income
• Regular child support or spousal support
• Unemployment compensation
• Pension and retirement income
• Workers' compensation
• Annuity payments
• State disability insurance

Income excluded from the calculation includes:

• Tax refunds
•  Social Security retirement benefits
•  Social Security Disability Insurance
• Supplemental Security Income
• Temporary Assistance for Needy Families

Step 2: Comparing Disposable Income

If the debtor makes more than their state's median income, it is necessary to complete the second part of the means test to determine eligibility.

If after deducting all allowed expenses -- actual and standardized expenses -- the debtor's disposable income is enough to pay some portion of unsecured debt in a Chapter 13 repayment plan, then you do not qualify for Chapter 7.

Explain Your Special Circumstances if You Fail the Means Test

A debtor that does not pass the bankruptcy means test may choose to file for Chapter 7 anyway.

In all likelihood, a motion will be made to dismiss the case or convert it to a Chapter 13 bankruptcy. The debtor can defend the motion by establishing the presence of "special circumstances," such as:

• Recent unemployment
• Unusually high rent
• A serious medical condition

To demonstrate the special circumstance, you must:

• Provide documentation for the requested expense or adjustment to your income
• Explain the necessity of the adjustment or expense

If the bankruptcy court allows the expense or adjustment and you pass the means test, then you will win the motion.

File for Chapter 13 Bankruptcy if You Fail the Means Test

A debtor that fails the means test may file for Chapter 13 bankruptcy. Chapter 13 places a filer's debt in a five-year repayment plan.

The plan must include the repayment of mandatory debts, such as priority debts and secured debts, and a portion of debts owed to nonpriority, unsecured creditors.

If you have questions about the Means Test or explaining special circumstances, a bankruptcy attorney can review the details of your case and explain your next steps.