If you’re considering filing for bankruptcy, the Means Test is a critical step in determining whether you qualify for Chapter 7 bankruptcy or must pursue Chapter 13.
Congress introduced this test in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act to prevent high-income earners from discharging debts too easily under Chapter 7. Instead, it directs those with sufficient income toward Chapter 13, which involves a repayment plan.
This article walks you through each step of the Means Test, explaining what it involves and why it’s necessary, so you can approach your bankruptcy filing with clarity and confidence.
The Bankruptcy Means Test begins by calculating your Current Monthly Income (CMI). You take the average of all income received over the six months before filing for bankruptcy. Include wages, salaries, tips, bonuses, overtime, self-employment income, rental income, dividends, retirement distributions, and even contributions from others, like a spouse or family member, if they help cover household expenses. Exclude Social Security benefits, certain disability payments, and specific victim compensation payments, as these do not count under bankruptcy law.
This step is crucial because it establishes a baseline for your financial situation. The law uses a six-month average to smooth out fluctuations, ensuring a fair snapshot of your income. For example, a one-time bonus or a slow month won’t skew the results. By focusing on this period, the test aims to assess whether you have enough income to repay debts, preventing those with temporary low income from qualifying for Chapter 7 when they could afford a repayment plan.
Next, you annualize your CMI by multiplying it by 12 and compare it to the median income for a household of your size in your state. The U.S. Census Bureau provides these median income figures, which the bankruptcy courts update regularly. If your annualized CMI falls below your state’s median, you automatically pass the Means Test and qualify for Chapter 7 bankruptcy. No further steps are needed.
This comparison serves as a gatekeeper. Congress designed it to quickly identify filers who clearly lack the means to repay debts, allowing them to discharge unsecured debts like credit card balances or medical bills under Chapter 7. The state median accounts for regional differences in cost of living and income levels, ensuring fairness. For instance, the median income in California is higher than in Mississippi, reflecting economic realities. If your income is below this threshold, the law presumes you cannot sustain a repayment plan, streamlining your path to Chapter 7.
If your CMI exceeds the state median, you proceed to the more detailed part of the Means Test to determine your disposable income. This involves subtracting specific allowed expenses from your CMI to see how much money remains for debt repayment. The law categorizes these expenses into three types: IRS standard deductions, actual expenses, and other necessary expenses. Each serves a distinct purpose in ensuring the test reflects your true financial capacity.
Start with IRS standard deductions, which cover necessities like housing, utilities, food, clothing, and transportation. These amounts, set by the IRS for tax collection purposes, vary by location and household size. For example, a family of four in New York City receives a higher housing allowance than one in rural Ohio, reflecting cost-of-living differences. The bankruptcy code uses these standards to create uniformity, preventing filers from inflating expenses to appear less able to pay.
Next, account for actual expenses, such as secured debt payments (e.g., mortgage or car loans) and priority debts (e.g., taxes or child support). You calculate the average monthly payment for these debts over the next 60 months, as this reflects your ongoing obligations. Including actual expenses ensures the test considers unavoidable commitments that reduce your ability to pay unsecured creditors, like credit card companies.
Finally, deduct other necessary expenses, such as health insurance, disability insurance, reasonable childcare costs, and charitable contributions (up to a limit). These are often based on your actual spending, provided it’s reasonable. The law allows these deductions to protect your ability to maintain a basic standard of living while assessing whether you can repay creditors.
This step is essential because it refines the initial income comparison. By subtracting standardized and actual expenses, the test calculates your disposable income—the money theoretically available for unsecured debts. Congress included this step to ensure that only those with significant disposable income are directed to Chapter 13, balancing debtor relief with creditor repayment.
After calculating your disposable income, multiply it by 60 to estimate how much you could pay toward unsecured debts over five years, the typical length of a Chapter 13 repayment plan. The Means Test then applies two thresholds to determine your eligibility for Chapter 7.
If your disposable income over 60 months is less than $10,000 (approximately $166.67 per month), you pass the Means Test and qualify for Chapter 7. The law assumes this amount is too small to fund a meaningful repayment plan. If your disposable income exceeds $16,500 (approximately $275 per month), you fail the Means Test and are presumed to have enough income for Chapter 13. For amounts between $10,000 and $16,500, an additional check applies: if your disposable income can pay at least 25% of your non-priority unsecured debts (e.g., credit cards or medical bills), you are directed to Chapter 13; otherwise, you qualify for Chapter 7.
These thresholds exist to create clear boundaries. The $10,000 limit protects low-income filers from being forced into repayment plans they can’t sustain, while the $16,500 cap ensures those with substantial disposable income repay creditors. The 25% rule for middle-range incomes balances debtor relief with creditor rights, ensuring Chapter 7 is reserved for those who genuinely lack repayment ability.
If you fail the Means Test, you can still argue for Chapter 7 by demonstrating special circumstances that reduce your disposable income. These might include unexpected medical expenses, a recent job loss, or other hardships not captured by the standard deductions. You must provide documentation, such as medical bills or termination letters, and show that these circumstances significantly impact your finances.
This step offers flexibility, recognizing that the rigid calculations of the Means Test may not fully capture your situation. Congress included this provision to prevent unfair outcomes, allowing courts to consider unique hardships. For example, a sudden disability could justify Chapter 7 eligibility despite a high CMI, ensuring the bankruptcy process remains equitable.
The Means Test is a cornerstone of modern bankruptcy law, designed to allocate relief fairly. By filtering out high-income earners from Chapter 7, it ensures that those with limited means can discharge debts quickly, while those with repayment capacity contribute to creditors through Chapter 13. Each step—calculating CMI, comparing it to the state median, determining disposable income, applying thresholds, and considering special circumstances—serves to balance debtor needs with creditor rights.
As you prepare to file, gather your financial records, including pay stubs, tax returns, and expense receipts, to complete the Means Test accurately. Consulting a bankruptcy attorney can also help you navigate the process, especially if your income is above the median or you face special circumstances. Understanding the Means Test empowers you to make informed decisions, ensuring your bankruptcy filing aligns with your financial reality.
This is not a journey to take lightly, but it is also not one to take alone. If you need to file for bankruptcy, reach out to us today to start your journey with us.
If you want to learn more about the options you have and steps to take, call us for a free consultation.
Parker and DuFresne
