Chapter 7 Means Test
Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced the “Means Test.” The “means test” was introduced to prevent the abuse of bankruptcy protection by debtors who could actually afford to repay their creditors.
The “means test” will determine if you are eligible for Chapter 7 bankruptcy filing. The “means test” is designed to prevent debtors with higher incomes from abusing Chapter 7 bankruptcy. To satisfy the “means test” you need not be penniless. You may have consistant monthly income and yet qualify for Chapter 7 bankruptcy when you have a lot of expenses like a high monthly mortgage payment. If you are filing for bankruptcy to discharge business debts, you need not take the “means test.”
The “means test” is meant to prevent the abuse of Chapter 7 bankruptcy by those who can afford to pay their debts. The “means test” determines the debtor’s monthly disposable income by deducting the debtor’s specific monthly expenses from the debtor’s current monthly income. The debtor’s current monthly income is the average income over the six calendar months prior to the bankruptcy filing. As the debtor’s disposable income increases, the chances of qualifying for Chapter 7 bankruptcy reduces.
You will qualify for Chapter 7 bankruptcy filing if your current monthly income is below the median household income in your state. No exceptions. Each state has its own median household income based on the size of the household and number of earning members. If your current monthly income exceeds the state median, then the “means test” gets more complex. You must then determine if you have enough disposable income left to repay at least a portion of your unsecured debts. If your disposable income left exceed a certain amount, then you cannot qualify for Chapter 7 bankruptcy.
The U.S. Census Bureau defines median income as the amount which divides the income distribution into two equal groups, half having income above that amount, and half having income below that amount. Median income levels vary from state to state and depend on household size. With the state each county and metropolitan region has different allowed amounts for categories of expenses: transportation, housing, basic necessities, etc.
If You Pass the Chapter 7 “means test” it does not necessarily mean you should file for Chapter 7 bankruptcy - merely because you can. You should consider all your options before you decide on the bankruptcy chapter.
If You Don't Pass the Chapter 7 “means test”, then your other option is to file for Chapter 13 bankruptcy which involves making monthly payments over a three or five year period according to a strict budget monitored by the court.
An experienced bankruptcy attorney can review your case and let you know if you qualify for a Chapter 7 bankruptcy and will advise you on your options if you fail the “means test.”