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The Chapter 7 Means Test: Do You Qualify?

written by: Patricia Tokar, CPA•edited by: Donna Cosmato•updated: 7/12/2011

Chapter 7 bankruptcy qualification, or the Chapter 7 Means Test, was introduced with the Bankruptcy Reform Act of 2005. This is the new barometer in the world of bankruptcy and determines whether or not your are eligible.

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    What is the Chapter 7 Means Test?

    Stated simply, the means test is a comparison of your family income against the median family income for your state. If your income falls below the median, then you qualify for a Chapter 7 bankruptcy.

    The means test for Chapter 7 is a two part test, though, and if you do not pass this "median income" part, then you would have a chance to pass in the more detailed second part of the test. If your income still calculates too high, you would not be able to automatically file a Chapter 7 bankruptcy. Your options would include filing a Chapter 13 bankruptcy, or your bankruptcy attorney may be able to present your special circumstance case to the US Trustee to qualify you.

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    What is the Difference Between Chapter 7 and Chapter 13?

    Good question. An understanding of the difference between these two bankruptcy chapters is important. Generally, a Chapter 7 bankruptcy is where all of your debts, except those which you specifically choose to continue paying, are erased and become no longer owed or collectible. Loans which are secured, or have collateral (such as a car or a house) usually require that the collaterol must be turned over to the creditor if the debt is erased. There are exceptions, like the debt on a wedding ring, so each secured debt should be carefully reviewed. You can choose to continue paying the secured debt and therefore keep the secured item (usually your house or car) by filing a reaffirmation agreement. The reaffirmation agreement must be approved by the creditor, the bankruptcy attorney, and by the court.

    A Chapter 13 is a more complex form of bankruptcy. In a Chapter 13 filing, strict calculations will be made to determine how much you can afford to pay on your debts and how many years you should make these payments. The Trustee distributes your monthly payment among your creditors each month, with secured debts being paid first and the remaining amount distributed among the unsecured debts. The Chapter 13 means test is a critical factor in determining the amount of your monthly payment.

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    How is the Means Test Calculated?

    There are two parts to the Chapter 7 means test. In the first part, your exact, actual monthly income for the six months prior to the month that you file for bankruptcy is reported. For example, if you file for bankruptcy in July of 2011, then your income for January 1, 2011 to June 30, 2011 is used to determine Chapter 7 bankruptcy qualification. Copies of paystubs, tax returns, and other supporting documents are required to be provided. Income includes all sources of income, such as gross wages, interest, business income, pensions, and unemployment. One exception is social security income, which is generally not considered for this test.

    This six months of income is then annualized to a yearly income, which is then compared to the standard median family income for your area. If your annualized income is greater than the standard median family income, then to qualify for a Chapter 7 bankruptcy, you will need to complete and pass the second, more detailed part of the means test.

    The median family income is based on household income and number of members of your household. It includes all the income of your household, including the income of a non-filing husband or wife. The charts are available on the US Trustee / Department of Justice site.

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    The Second Part of the Means Test

    If your annual income is higher than the median test, then you may still qualify for a Chapter 7 bankruptcy by passing the second part of the means test calculation. This second part reviews your monthly expenses and installment loans (such as house and car payments). Consideration is given to special circumstances, such as the expenses of caring for a special needs child, high utility costs, mandatory union dues, child support, child care, education expenses, and the costs of prescription drugs or medical treatments. The IRS standard charts for housing, utilities, transportation, and food costs - are used. The standard expenses depend on the number of people and gross income of your household. Information on these standards can be found on the US Trustee / Department of Justice site.

    Your calculated total allowed monthly expenses on the second part of the means test will then be subtracted from your monthly income calculated on the first part of the means test. If the result is within the allowed standard, (roughly $110.00 per month or less), then you "pass" the means test and will still qualify for a Chapter 7 bankruptcy. If your monthly income less your expenses on the means test is greater than roughly $180.00 per month, then "the presumption of abuse" arises and you would not pass the Chapter 7 means test.

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    What if My Income is Still Too High for a Chapter 7?

    Your bankruptcy attorney is a key player in filing for bankruptcy, especially if you will have difficulty passing the means test. A majority of filers who do not pass the first part of the bankruptcy means test for Chapter 7 will still be able to qualify after they complete the second, more complex, part of the means test. Your attorney should carefully question you to obtain accurate and complete information for calculating this second part of the test.

    If your income was unusually high in the last six months and it is now changed, then waiting a month or two to file for bankruptcy may resolve the issue. For example, you may have recently had your work hours reduced and you expect lower income for the next several months. Or perhaps you received a large, one-time bonus in the last six months which makes your six-month income too high. Waiting until enough time has passed that the bonus no longer figures in the means test, or until your new six-month income is lower may make the difference.

    Finally, if you are unable to pass the Chapter 7 bankruptcy means test, you should consider filing for a Chapter 13 bankruptcy.

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    Legal Section

    This article is not intended to give any specific legal or other professional advice. This is a general guideline only and will be affected by your individual circumstances and the rules of your local courts. It is subject to change as the bankruptcy codes change. Please seek the advice of a bankruptcy attorney for specific information.