The Chapter 7 means test is the analysis that determines whether a person can file Chapter 7 bankruptcy. It’s called the bankruptcy means test because, at its most basic level, it looks at whether someone has the means to pay their debts.
Written by Attorney Andrea Wimmer.
Updated August 4, 2020
One of the most confusing things about filing for Chapter 7 bankruptcy is the means test analysis. The availability of a number of free means test calculators online only helps sow more confusion, unfortunately. This article will explore what the means test is, what it does, how it works, and why there really is no such thing as a means test “calculator” - only a means test calculation.
What is the Chapter 7 means test?
The Chapter 7 means test, generally just called the means test, is the analysis that determines whether a person is eligible for relief under Chapter 7 of the Bankruptcy Code based on their monthly income. It’s called the bankruptcy means test because, at its most basic level, it looks at whether someone has the means to pay their debts.
Why do we have the means test?
Congress was concerned that folks were abusing the bankruptcy system by filing Chapter 7 bankruptcy cases even though they could afford to pay at least some of their debts. To prevent that from happening, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) made means testing a requirement for everyone seeking to deal with their consumer debts through bankruptcy. If the means test determines that someone current monthly income is sufficient to pay at least some of their debts through a repayment plan in a Chapter 13 bankruptcy, a presumption of abuse arises. In that case, it's up to the person looking to file Chapter 7 to prove to the bankruptcy court that their financial situation calls for relief only available by filing a Chapter 7 case.
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How does the means test work?
The Chapter 7 means test calculation is really a two-step analysis, though many low-income families don’t have to worry about the second step. Let’s take a look at how it works.
Step 1: Comparing your income to the median income
Under the first part of the means test, the filer compares their gross household income to the median household income for a family of the same size in their state. The median household income is determined by the U.S. Census Bureau and updated multiple times per year. The most up-to-date information about the current median income for your state is available from the Office of the United States Trustee (sometimes called the UST’s office), which is the division of the Department of Justice that is tasked to prevent abuse of the bankruptcy system.
❗❗ If you’re looking for the current median household income, don’t rely on simply searching the internet. Since the information changes on a regular basis, the only reliable place to check the numbers currently in effect is on the UST’s website. ❗❗
Now that you know how to look up the median income for your state, let’s take a look at how to calculate your average income to compare.
Calculating your gross income for the means test
The Bankruptcy Code sets forth strict rules for how to calculate your income for purposes of the means test. Since the UST’s office routinely reviews the means test calculations of Chapter 7 filers, it’s important to get this part right. Otherwise, you may think you qualify when you really don’t or worse yet, you qualify for Chapter 7 bankruptcy without realizing it.
(1) Determine the relevant time period
Even though the means test compares annual incomes, the income you’ll be comparing to the median income on your means test form is based on the 6 months before filing bankruptcy. This time period does not include the month that your case is filed in. So, if someone wants to file in March 2020, they’d look at their income from September 1, 2019 to February 29, 2020.
If there is a delay and they end up filing in April 2020, the relevant time period will move up accordingly. Now the relevant time frame is from October 1, 2019 to March 31, 2020.
The fact that this is a bit of a moving target is very important to keep in mind, especially if your income fluctuates or you get the occasional bonus. Someone who would have easily passed the means test for a March filing may not qualify for an April filing if they get their annual bonus paid out in March.
The reason for this is the strange nature of the calculation itself, where your yearly income is calculated by doubling the income of the last six months. It also means that you can accidentally disqualify yourself from filing a Chapter 7 case if you’re working a lot of overtime just to make ends meet and keep your creditors paid.
(2) Review your sources of income
While this can get really complicated if you’re a business owner, or you share your household expenses with roommates, if you’re a wage earner, it’s relatively straight forward. All gross wages (whether you’re on salary or paid by the hour) are included on the means test. Gross wages are what your paycheck says you’ve earned before all the taxes and other deductions are taken out.
Here are some other sources of income you have to include in the means test calculation:
All amounts you receive on a regular basis to help with household expenses. This can be child support (pursuant to a court order or otherwise), contributions to the household income from an unmarried partner, or money you receive from your parents or other relatives to help out with expenses.
Income from business, including income from a rental property
Pension & retirement income
For purposes of the means test, income does not include benefits received under the Social Security Act, including monthly SSI and SSDI.
Comparison to Median Income
Once you’ve calculated your gross annual income based on the prior 6 months, the rest is pretty straight-forward. Pull up the UST’s website on all things means test and scroll down until you find the drop down menu titled “Data Required for Completing the 122A Forms and the 122C Forms.” Once you’ve made a selection in the drop down menu, you’ll be brought to another section of the UST’s website, which, at long last, will give you a link to the “Median Family Income Based on State/Territory and Family Size.” That, in turn, will show you the median income for a household with the same number of people as yours.
❗❗ This is the only way to make sure you’re looking at the most current number. Since the numbers change, there is no single link you can bookmark that will always give you the most up to date numbers without going through the process described above. ❗❗
At that point, your job is easy: Look at the total household income you’ve just calculated for yourself and compare it to the number on the chart for your state and household size.
If your income is less than that number, you are below the median income and don’t have to complete the rest of the means test analysis. If your income is greater than the median income, a more complex calculation is required to determine whether Chapter 7 remains an option for this person.
Note: Upsolve’s free web app is available only for filers whose income is below the state median income because the second part of the means calculation requires a legal analysis.
Step 2: Accounting for expenses
Folks whose income exceeds the median income may nevertheless qualify for Chapter 7 relief, if part two of the means test analysis reveals that they don’t have enough disposable income to pay at least 25% of their unsecured nonpriority debts over 5 years.
Unfortunately, this analysis is not nearly as straight-forward as it sounds, as the Bankruptcy Code sets forth very detailed and specific rules regarding what type of expenses can be deducted as part of this analysis.
Types of expenses
Generally speaking, the types of allowed expenses that can be deducted in part two of the means test analysis fall in 4 categories:
(1) Expenses based on national standards established by the IRS. This means that the filer deducts not their actual expenses for a specific category, but rather, the IRS standard amount set for that category. These expenses include the following subcategories:
Food, Clothing & Other Items
Out of Pocket Health Care Costs
Housing and Utilities
(2) Payments to secured and priority creditors. If the filer is keeping the property securing a certain debt, the payment on this debt can be deducted as an expense on the means test. The most common examples of secured debt payments that can be deducted on the means test are your home mortgage and payments on your car loan(s). Expenses related to priority debts, such as tax debts, that won’t be discharged as part of the Chapter 7 case can also be deducted.
(3) Actual expenses. Some expense deductions can be increased if the filer can show that their actual, reasonable and necessary expenses for a particular category are greater than the number allowed under the IRS standards. Additionally, certain actual expenses, including payments of domestic support obligations pursuant to a court order, are considered as part of this analysis. This does not include payments subject to a court order - such as a writ of garnishment - that have to stop once the bankruptcy case has been filed.
(4) Administrative expenses. Since the purpose of the test is to determine how much someone’s creditors would receive if the person filed a Chapter 13 instead of a Chapter 7 bankruptcy, the means test accounts for the administrative expenses that would be part of the Chapter 13 case. These expenses reduce the amount of money that would go to unsecured creditors in a Chapter 13, and since that’s the number that matters for determining whether Chapter 7 is available to the filer, it’s important to remember to account for them.
If there is not enough money left over to pay at least 25% of the filers unsecured debts over a hypothetical 5-year Chapter 13 plan, the filer is eligible for relief under Chapter 7 of the Bankruptcy Code.
The Chapter 7 means test determines whether allowing someone to discharge their debts would be an abuse of the bankruptcy system. If your gross income based on the 6 months before filing bankruptcy is below the median income for your state, you pass the means test. Otherwise, a detailed legal analysis is required to determine whether Chapter 7 is an option for you. If you’re below the median income for your state, don’t own a home, don’t have assets (including possible personal injury lawsuits) worth more than $10,000 and you’re looking to file without your spouse, Upsolve can provide you with the tools necessary to prepare your bankruptcy forms and put you on the path to debt relief without having to hire an attorney. If your income exceeds the median, remember - that means you’re doing better than half of the people in your state - and consider speaking to a bankruptcy attorney in your area to find the right debt relief option for you.