The Bankruptcy Means Test Explained: Who Qualifies for Chapter 7

To file Chapter 7, individuals with mostly consumer debts must pass a means test that compares income to their state's median. Understanding how it works helps you know whether Chapter 7 is realistic or whether Chapter 13 is a better path.

What the means test is

Congress created the means test to limit Chapter 7 to people who cannot repay a meaningful part of their debts. It has two main steps. First, you compare your average monthly income over the six months before filing to the median income for a household of your size in your state. If you are below the median, you generally pass. If you are above, you move to a second calculation that subtracts allowed expenses to see if you have disposable income.

Step 1: Current monthly income

• Add all income from the six full months before the month you file.
• Divide by six to get the average.
• Include wages, business income, rental income, pensions and regular contributions from others.
• Social Security benefits are excluded from this calculation.
• Multiply by 12 to compare to the annual median.

Step 2: If you are above the median

1. Deduct allowed expenses using standards set by the IRS and the bankruptcy forms.
2. Include necessary expenses such as housing, utilities, transportation, taxes and secured debt payments.
3. Calculate disposable income.
4. If disposable income over five years is above certain thresholds, Chapter 7 may be presumed abusive, and you may need to file Chapter 13 instead.
5. There are rules for rebutting the presumption in special circumstances.

Who is exempt from the means test

• People whose debts are primarily not consumer debts, such as business debts.
• Certain disabled veterans with debts incurred during service.
• Certain reservists and National Guard members with qualifying service.

If you do not qualify for Chapter 7

• Chapter 13 repayment plans are designed for people with regular income who can pay part of their debts.
• You may consider negotiation, debt management plans or waiting until income falls.
• A lawyer can check special circumstances that reduce income or increase expenses.

Tips

• Gather six months of pay stubs and income records.
• Be accurate and complete.
• Do not reduce income artificially before filing.
• Use official median income tables, which change.
• Talk to a lawyer because the calculations are technical.

Why the means test exists

The means test is intended to prevent people who can afford to repay a meaningful amount of their debts from using Chapter 7. It uses averages and standardized expenses, so it can produce results that differ from your real budget. Some people who think they will not qualify do, and others who expected to qualify do not. A careful calculation avoids surprises.

Special circumstances and timing

Because the test uses an average of the six months before filing, timing matters. A recent drop in income may not appear in the calculation, although special circumstances can sometimes be considered. Filing a month earlier or later can change the result. A lawyer can help assess timing while avoiding any appearance of manipulating income.

Real-life scenarios

1. A worker earning below the state median for a family of four qualifies for Chapter 7.
2. A household above the median subtracts allowed expenses and finds low disposable income, so it qualifies.
3. A high-income filer with significant disposable income is directed to Chapter 13.

Common mistakes to avoid

• Using the wrong median figure.
• Forgetting to include all household income.
• Estimating instead of documenting income.
• Taking out loans or changing income to qualify.
• Misunderstanding allowed expenses.
• Not asking about exemptions from the test.

Questions to ask a professional

• What is the current median for my household size?
• Do any of my debts count as consumer debts?
• Which expenses are allowed?
• Should I wait to file?
• Is Chapter 13 a better option?

A practical action plan

1. Collect six months of income records.
2. Find the median for your household.
3. Complete the means test forms.
4. Review with a lawyer.
5. Choose a chapter based on results.

Terms you may hear

• Median income: the midpoint income for a household size in a state.
• Disposable income: income after allowed expenses.
• Presumption of abuse: a finding that Chapter 7 is not appropriate.
• Consumer debt: debt incurred for personal purposes.
• Special circumstances: situations that may adjust the test.

Practical considerations

Prepare for the means test by gathering income records for the six full months before the month you file, including pay stubs, bank statements and benefit letters. Keep records of business income and expenses if you are self-employed. Complete the forms carefully, because errors can lead to delays or objections.

Special situations and exceptions

If you do not pass, do not assume bankruptcy is closed to you. Chapter 13 may be an option, and in some cases special circumstances or changes in income can alter the analysis. A bankruptcy lawyer can review your numbers and suggest approaches, including timing or alternatives.

Frequently asked questions