Qualifying for Chapter 7 Bankruptcy, a Simple Explanation of the Means Test!

The means test was enacted in 2005 as a way to more systematically determine who may receive a chapter 7 bankruptcy discharge. Despite all the subsequent litigation, issues, and technicalities associated with the means test, the means test is an income qualification. If you make too much money, the bankruptcy code wants you to pay some amount back to your creditors. The irony of the means test is that it was intended to simplify the process of weeding out chapter 7 filers, but passing the means test is now very much an art form.

The Means Test is made up of 3 Tests

Test 1: The Over/Under (note, this is how I refer to it, over/under is not official terminology).
The Over/Under simply asks whether in the previous 6 months before filing your chapter 7 bankruptcy is your combined household income (excluding any income from the Social Security Administration) above your state’s annual median income for your household size.  If you are under, you presumably qualify for chapter 7 bankruptcy and you do NOT go on to Test 2, if you are over, you go on to Test 2.

Test 2: Disposable Monthly Income Test.
If you are over median on Test 1, then the Means Test has you calculate what, if any, disposable income you might have after deducting the IRS allowed expenses, secured debt payments, and certain other expenses from your income. If you have disposable income (money left over after all deductions), then you are presumably a chapter 13 bankruptcy as Test 2 is showing you have some money to pay back some amount to your creditors.

Passing Test 2 is an art. Unfortunately, very few attorneys take the time to massage a case to see if a person can pass the Disposable Income Test. If your case hinges on passing test 2, and every attorney is saying you should be a chapter 13 bankruptcy, get a second opinion. Granted, you may, in fact, be a chapter 13 bankruptcy; and in reality, most over median bankruptcy clients will be chapter 13 bankruptcies, but at least find an attorney that will entertain a fight to keep you in chapter 7 bankruptcy.

Test 3: Not Enough Disposable Income to Matter.
If you have disposable monthly income according to Test 2, then you move to Test 3. Test 3 rarely applies; but basically, if your monthly disposable income multiplied by 60 is less than $6,575, then you are presumably a chapter 7 bankruptcy, If your disposable monthly income multiplied by 60 is between $6,575 and $10,950 and that amount will not pay at least 25% of your non-priority unsecured debt, then you presumably qualify for chapter 7 bankruptcy. In essence, within those narrow guidelines, the bankruptcy code is saying that there is not enough left over at the end of the month to matter, and therefore, you may still receive a chapter 7 bankruptcy discharge.

Exceptions to the Means Test

There are certain exceptions to even bothering with the means test; the exceptions are limited, but very useful and even many bankruptcy attorneys do not know how to properly employ these exceptions.  If you qualify for one of these exceptions, you don’t even complete the means test and you can even have disposable income or very high income and still qualify for chapter 7 bankruptcy.