The Chapter 7 means test is the analysis that determines whether you're eligible to 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 (ability) to pay their debts. The means test has two main steps, but if you "pass" the first step, you don't have to do the second step. In the first step, you'll compare your income to the median income in your state based on the size of your household. If you don't "pass" the first step, you can move on to the second step, which takes your expenses into account as well.
Written by Attorney Andrea Wimmer.
Updated July 12, 2023
One of the most confusing things about filing for Chapter 7 bankruptcy is the means test analysis. There are various “free means test calculators” online that often lead to more confusion. This article will explore what the means test is, what it does, and how it works. This will help you understand 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 is generally just called the means test. It’s the analysis that determines whether you’re eligible for relief under Chapter 7 bankruptcy based on your monthly income. It’s called the bankruptcy means test because it calculates whether you have the financial means (or ability) to pay your 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) established a means testing requirement. If you want to deal with your consumer debts through bankruptcy, you have to do a means test calculation to see if you’re eligible.
If you want to file a Chapter 7 bankruptcy but the means test determines that you have enough current monthly income to pay at least some of your debts there’s said to be “a presumption of abuse.” In this case, if you want to file Chapter 7 you have to prove to the bankruptcy court that your financial situation calls for relief that’s only available by filing a Chapter 7 case. Otherwise, you can file for Chapter 13 bankruptcy, which allows you to use your extra monthly income to pay your debts through a repayment plan.
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.
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Step 1: Compare Your Income to the Median Income
In the first step, 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 (UST). This is the division of the Department of Justice that’s tasked with preventing abuse of the bankruptcy system.
❗❗ If you’re looking for the current median household income, don’t rely on a simple Google search. Since the information changes regularly, 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.
How To Calculate Your Gross Income for the Means Test
Bankruptcy law establishes strict rules for how to calculate your income for purposes of the means test. Since the UST 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 may qualify for Chapter 7 bankruptcy without realizing it.
First, Determine the Relevant Time Period
Even though the means test looks at median annual income for comparison, the income you use on your means test form is based on the six months before filing bankruptcy. This time period doesn’t include the month your case is filed in. So if you want to file in June 2023, look at your income from December 1, 2022, to May 31, 2023.
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 an occasional bonus. You may easily pass the means test for a June filing but not a January filing if you get an annual bonus paid out in December. You can also accidentally disqualify yourself from filing a Chapter 7 case if you’re working a lot of overtime to make ends meet and keep your creditors paid.
Next, Review Your Income Sources
Reviewing income may be complicated if you’re a business owner or you share your household expenses with roommates. But if you’re a wage earner, it’s relatively straightforward. All gross wages (whether you’re salaried or paid by the hour) are included in the means test. Gross wages are what you earn before 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 regularly 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 and retirement income
For purposes of the means test, income does not include benefits received under the Social Security Act, including monthly SSI and SSDI. Also, because of the HAVEN Act, veterans and active duty service members don't have to count income related to their service.
Finally, Compare Your Income to the Median Income in Your State
Now that you’ve calculated your gross annual income, go to the UST’s website and find the drop-down menu titled “Data Required for Completing the 122A Forms and the 122C Forms.” Once you’ve clicked the relevant selection from the menu, you’ll be brought to another section of the UST’s website with a link titled “Median Family Income Based on State/Territory and Family Size.” Clicking this link shows you the median income for a household in your state 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, no single link provides the most up-to-date numbers. You must complete the process described above. ❗❗
Now 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’re 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, you must complete part two, a more complex calculation to determine whether Chapter 7 remains an option.
Note: Upsolve’s free web app is available only for filers whose income is below the state median income because part two of the means test requires a legal analysis.
Step 2: Account for Expenses
The second part of the means test is looking to see if you have enough disposable income to pay at least 25% of certain debts (called priority unsecured debts) in the next five years. If you don't have enough disposable income to pay this amount of those debts, you'll be eligible to file Chapter 7 bankruptcy.
At its simplest, disposable income is your income minus your expenses. Unfortunately, when it comes to the means test this analysis is actually quite complication. And that comes down to what types of expenses can be included here. The Bankruptcy Code has detailed and specific rules regarding what expenses can be deducted in the means test analysis.
What Types of Expenses Can Be Deduced in Part 2 of the Means Test?
Generally speaking, the types of allowed expenses you can deduct in part two of the means test analysis fall into four categories:
1. Expenses based on national standards established by the IRS: You don’t deduct your actual expenses for a specific category but rather the IRS standard amount set for that category. These expenses include the following subcategories:
Food, clothing, and other items
Out-of-pocket health care expenses
Housing and utilities
2. Payments to secured and priority creditors: If you’re keeping the property securing a certain debt, the payment on it can be deducted as an expense. The most common examples of secured debt payments eligible for deduction are your home mortgage and car loan payments. 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: You can increase some expense deductions if you can prove your actual, reasonable, necessary expenses for a particular category are greater than the number allowed under the IRS standards. Additionally, certain actual expenses, including court-ordered domestic support obligations, are considered part of this analysis. But it doesn’t 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 your creditors would receive if you filed Chapter 13 instead of 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 case. Since that’s what matters for determining your eligibility for Chapter 7, it’s important to remember to account for these.
If there is not enough money left over to pay at least 25% of your unsecured debts over a hypothetical five-year Chapter 13 plan, you’re 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 six 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 are 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 hiring an attorney.
If your income exceeds the median, remember: You’re doing better than half of the people in your state. Consider speaking to a bankruptcy attorney in your area to find the right debt relief option for you, and check out the video below ⬇️ for more!