The Chapter 7 Bankruptcy Means Test
Who Can Qualify for Bankruptcy Under Chapter 7?
The means test is required for anyone looking to file Chapter 7 bankruptcy. This is an income-based test designed to reserve the powerful benefits of Chapter 7 for those who truly cannot afford to pay back their debts.
If you’re left with little disposable income each month to pay your bills, you’ll likely be able to file Chapter 7 bankruptcy and discharge your unsecured debts. Learn more about the means test:
The Bankruptcy Means Test: Who Can File?
The bankruptcy law was designed to ensure that Chapter 7 bankruptcy protection is given to those who need it most. The means test is the qualifying step for those looking for file Chapter 7.
The Chapter 7 means test is actually a formula that is used in determining whether or not an individual would have enough money available to make minimal payments to creditors in a Chapter 13 bankruptcy plan. In many cases, those who want to file Chapter 7 are able to do so.
One of the court’s fundamental goals in bankruptcy is to reserve Chapter 7 for men and women who have no means to repay their debts. Before the law change, there were fewer restrictions on eligibility for those who wished to wipe out credit card debt, medical bills, and most personal loans through Chapter 7 bankruptcy (regardless of their ability to repay their debts).
Are you wondering if Chapter 7 is right for you? Talk to a bankruptcy lawyer about your eligibility to file bankruptcy under Chapter 7 or 13:
The Means Test is a Two-Step Process
Step One: Median Income Comparison
The first step in the Chapter 7 bankruptcy means test is simple: it compares your income to the median income in your state for a family the same size as yours.
The median income for your family size may differ dramatically depending upon where you live, and an attorney can tell you whether you are above or below the applicable median income.
Check out our state median incomes table for more information.
If your income is higher than the median income, it doesn’t necessarily mean that you can’t file for Chapter 7 bankruptcy; it just triggers the second step in the test.
Step Two: Calculating Disposable Income and Unsecured Debts
The second step is a bit more complicated, and actually breaks down into separate pieces.
Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your “disposable income.”
If your projected disposable income over the next five years equals less than $6,000 ($100/month), you will likely “pass” and become eligible to file under Chapter 7.
If your disposable income is greater than $10,000 over the next five years, a presumption arises that you do not really need to file for Chapter 7 bankruptcy. If you can demonstrate special circumstances, you may still be allowed to do so.
In the grey area, between $6,000 and $10,000, another calculation is typically required.
This calculation compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible.
If your disposable income over that five years is greater than 25 percent of your unsecured, non-priority debts, you’ll probably find yourself in the same circumstances as if you’d had more than $10,000 in disposable income.
If your disposable income over a five year period is less than 25 percent of your unsecured, non-priority debts, you will likely “pass” the means test.
You Don’t Need to Go Through the Chapter 7 Means Test Alone
A local bankruptcy attorney can crunch the numbers for you and tell you whether or not you qualify for Chapter 7 bankruptcy under the means test.
The calculation can be complicated, not only because of the numerous steps that may be involved, but because it requires an understanding of the rules concerning how your income is calculated for means test purposes and which debts are classified as unsecured and non-priority.
Many people who want to file for Chapter 7 bankruptcy find that they are still eligible to do so. A local bankruptcy attorney can help you determine how the means test may affect your bankruptcy options.
Still Have Questions About the Means Test?
For more information on the Chapter 7 means test and the role it plays when filing bankruptcy, connect with a local bankruptcy lawyer.
Please remember that while millions of Americans have filed for bankruptcy, each case is different. A local attorney can help you determine if you may qualify for Chapter 7, if Chapter 13 could be a better option, or if some other debt relief action may be better for you.
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The above summary is not legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.