Chapter 7 Bankruptcy: Understanding the "Means Test"

If you are considering bankruptcy, you most likely have heard of Chapter 7 bankruptcy. However, due to the nature of a Chapter 7 bankruptcy, it is first important to make sure you understand the "means test" and see if you can meet these qualifications. There are many differences between a Chapter 7 and Chapter 13 bankruptcy, but the fundamental difference is that a Chapter 7 bankruptcy is a liquidation of debt. A Chapter 13 bankruptcy, on the other hand, is a reorganization of debt, and will require you to pay off at least part of your debt in installments, usually over the course of 3 to 5 years. There are pros and cons for filing under each chapter, but first, you should familiarize yourself with the "means test" to make sure you are eligible to file.

What Is the Means Test?

The purpose of the means test is protect Chapter 7 bankruptcy from abusive filings and make sure that it is only available to those who truly have no means to pay back their debts. Before filing a Chapter 7 bankruptcy, a means test will determine if you genuinely need your debts to be fully discharged. The test will examine your income and expenses and is actually quite simple to follow. Those who cannot qualify for Chapter 7 based on the means test will then be redirected to filing a Chapter 13 bankruptcy where a debt repayment plan is established.

Means Tests Summarized

1. Monthly Median Income
   • If your income is below your state's median income for the same-sized household (as determined by the US Census Bureau), you "pass" and are finished with the means test--you are eligible for a Chapter 7 filing and don't need to perform any more calculations.
   • If your income is above the state's median, you must continue to step 2 and evaluate your disposable income.
2. Disposable Income Calculation
   • The IRS guidelines allow certain expenses to be deducted from your income when determining your monthly disposable income. These include taxes, rent, utilities, child care, and payments on loans secured by property like cars or real estate.
   • Take this monthly disposable income and multiply by 60. [ 5 years = 60 months]
   • If this calculation is less than $6,575--you are eligible for a Chapter 7 filing.
   • If this calculation is greater than $10,950--you are not eligible for Chapter 7 except for special exemptions.
   • If this calculation falls between those amounts, you must now evaluate your current unsecured debt.
   • Total Unsecured Debt
   • Calculate 25% of your total unsecured debt and non-priority debt
   • If your disposable income over 5 years is greater than 25% of this calculation--you are not eligible for a Chapter 7 filing except for special exemptions.
   • If your disposable income over 5 years is less than 25% of this calculation, you have passed the means step and can file under a Chapter 7 Bankruptcy.

Get Help

There are only a few steps to the means test, however you can see with the different calculations that things can get complicated. Local bankruptcy attorneys will be quite helpful as they stay current with IRS guidelines and state regulations. You will most likely need their guidance when classifying your debt and calculating your disposable income which involves the IRS allowed expenses. Aside from the means test, a qualified professional will be there for you during the entire process and be your foundation of support during this troubling time.

About the Author:
Heindrick So works for a Bay Area Real Estate company that specializes in residential wholesale lending. His work experience is comprised mostly of sales and marketing background which included a high end media sales position at Magnolia Hi-fi. Heindrick is also in his final year of pursuing his Bachelor's Degree in Electrical Engineering at San Jose State University.