Taking the Means Test — Do You Qualify for Chapter 7 Bankruptcy?
Written by: Kristy Welsh
Last Updated: October 2, 2017
President Bush signed into law the The Bankruptcy Abuse Prevention and Consumer Protection Act back in April of 2005, which made some drastic changes to the U.S. Bankruptcy Code. One of those changes was the addition of a Means Test.
The Means Test is a series of financial questions aimed to see if the consumer qualifies for Chapter 7 bankruptcy. Prior to 2005, filers could choose the type of bankruptcy that was best for them — CH 7 or CH 13 bankruptcy — and the majority of filers chose Chapter 7 since it was a way to wipe out all of their debt no matter what their financial situation was at the time. Now, one has to "qualify" in order to file Chapter 7 bankruptcy and if you don't qualify, you must file Chapter 13 bankruptcy. In contrast to CH 7, CH 13 is more of a "reorganizing" bankruptcy where you have to pay back all hour debts. No wonder everyone wanted to file for Chapter 7.
How Does the Mean Test Work?
The Means Test was designed to limit the use of Chapter 7 bankruptcy to those who truly can't pay their debts. The test is designed to calculate your current monthly disposable income and the higher your disposable income, the more likely you won't be allowed to use CH 7 bankruptcy. Instead, you will be directed to file CH 13 instead.
The test will work as follows:
Question # 1:
Is your family income LESS than the median income for a household of your size in your state? Here's how you tell. Go to the State Median Family Income for cases filed between November 1, 2016 and March 31, 2017, inclusively.
If your income is less than the median income, you do not need to complete any more of the Means Test and you can file for Chapter 7 bankruptcy.
If your income is above the median income, you need to continue on to the following question.
Question # 2:
For those whose household income is higher than the state median, you will need to determine your disposable income and if you have enough disposable income to pay your creditors.
The calculations for this vary by state, county and metropolitan area as there are different allowable amounts for different expenses. Use this online Bankruptcy Means Test Calculator to determine your eligibility.
If you do not pass this part of the Means Test, Chapter 7 bankruptcy cannot be filed but Chapter 13 bankruptcy may be filed.
What if You Pass the Chapter 7 Means Test?
Just because you passed the Means Test does not necessarily mean you have to file for Chapter 7 bankruptcy. Before you make this life and credit changing decision, it is best to talk to a qualified bankruptcy attorney. Your attorney may offer some alternatives to filing bankruptcy, which could save you a lot of money and grief. Filing for bankruptcy should be your last resort and definitely not a decision to take lightly.
What if You Don't Pass the Chapter 7 Means Test?
If you don't pass the Means Test, it means you will have to file for Chapter 13 bankruptcy instead. CH 13 requires you to make monthly payments to your creditors over 3 to 5 years and these payments are monitored by the court. You can also read all about other advantages to Chapter 13.
Again, before you decide to file for CH 13 bankruptcy, it is best to get legal advice from a qualified bankruptcy attorney.