How to pass the Chapter 7 Means Test?

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Chapter 7 wipes out certain debts in one quick swoop.  If you decide that Chapter 7 bankruptcy is right for you, you will need to complete the “means test” forms.  These forms take a look at your eligibility by comparing your income with your state’s income limits.  

Some people in your situation start by using the Chapter 7 means test calculator for a quick glimpse at their income eligibility to file Chapter 7 bankruptcy in their state.  The Bankruptcy Court will also require you to complete the Chapter 7 Means Test forms to determine your eligibility before filing your full bankruptcy petition.  These forms can be confusing, but Upsolve can help you through the process.  

What are the Chapter 7 “Means Test” forms?

Filing Chapter 7 bankruptcy requires you to complete 3 means test forms to determine your eligibility for Chapter 7 bankruptcy relief. In most cases, after completing the Current Monthly Income Statement form, if you fall below the income limitations, you can file and are eligible for Chapter 7 bankruptcy relief. If you are above the income limitations, you will need to complete the Means Test Calculation form.  In rare cases, you may be above the income limitations, but “exempt” from the means test entirely. If you are exempt from the means test, you are eligible for Chapter 7 bankruptcy relief even if your income is above the median income level for your state. In other words, the means test does not apply to you if you are “exempt.” We will discuss scenarios in which you are exempt in a later section.

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How do I fill out the Statement of Current Monthly Income?

The first form, Chapter 7 Statement of Your Current Monthly Income, is used to calculate your current monthly income and to determine how it compares to the median income limit in your state for your household size. You will start by filling in your marital status.

To complete questions #2 - #11 on this form, you will need to calculate your six-month average gross income by adding your gross income from the past six months and dividing by 6.  Gross income is money from any income source before any payment of taxes, social security, or living expenses.

Step 1:  Calculating your monthly income amount

First, add up your gross income from the last six months.  Take that amount, and divide it by six to calculate your current monthly income.  For example, for the “wages, salaries, tips” section, add up your wages, salaries, and tips for the past 6 months and divide by six to get your monthly average income. You will need to do the same for any income you receive from other sources other than from employment.

Step 2:  Calculate your annual, monthly income

Next, on question #12, is where you calculate your annual income based on your monthly income.  You take the current monthly income amount (from line #11), and you multiply by twelve for the annual income amount.

Step 3:  Compare it to families of your household size in your state

Then, on question #13, is where  your annual income is compared to families of your household size in your state.  Remember, this calculation is based on the income from the most recent previous six months. Thus, it may look different than the amount you have listed on your federal tax return.

Compare, question #14:  If your income is less than the median listed for a family of your size in your state, you have met the means test requirements, and you can now file for Chapter 7 bankruptcy.  You do not need to fill out the other forms.

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What if my income is more than the limit for my state?

If your income is more than the limit listed for a family of your size in your state, do not worry.  You can move on to the next form and complete the “Means Test Calculation”.

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How do I fill out the Means Test Calculation?

To qualify for Chapter 7 through the Means Test Calculation, you will usually end up with negative disposable monthly income. Disposable monthly income is the money you have left after you have paid your income taxes and subtracted certain deductions.  Having positive disposable income means you have money left over at the end of the month to pay down your debt. Note that even if your disposable income is positive, this will not necessarily prohibit you from filing Chapter 7 and obtaining bankruptcy relief. However, having a positive disposable income amount could lead to a “presumption of abuse.” If, for example, you have a disposable monthly income amount of $1000 that you could dedicate to paying off your debt, filing for a Chapter 7 bankruptcy could be construed as “abuse.” In such a scenario, you would likely benefit from filing a Chapter 13 bankruptcy instead.

Step 1:  Outline your expenses

Outline your expenses for the six months before filing for bankruptcy (average of the six months) including taxes, social security, and living expenses.  The IRS’s allowable living expenses limit certain living expenses. Additional living expenses may be included so long as they can be justified to the judge.  Additional living expenses can consist of larger mortgage/car payments, income taxes, dependent care, healthcare, charitable contributions, court-ordered payments, and involuntary employment deductions.

Step 2:  Subtract the average of taxes, social security, and living expenses

You take the current monthly income (average of the six months) and subtract what your pay in taxes, social security, and living expenses (averaged over six months).  

Step 3:  Calculate disposable income limits

If you have a negative disposable income, you can stop here as you have met the means test and can file for Chapter 7.  Negative disposable income means that you do not have money left over at the end of the month to pay down your debt. There is no “presumption of abuse,” and you have essentially “passed” the means test.

If you have positive disposable income, you may want to consider filing Chapter 13 bankruptcy.  Whether you need help, information, or to find an attorney, Upsolve may be able to assist you.  

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Do I qualify to be exempt from the Means Test?

Usually, you need to make below the median income to file Chapter 7, but in rare circumstances, you may make over the median income and still be eligible to file a Chapter 7 bankruptcy. The form to complete if you think you are exempt is the Statement of Exemption from Abuse.  Part 1 could exempt you according to the type of debt. If your debts are not consumer debts, then you would be exempt.  Consumer debts are personal or household liabilities. For example, if your debt is primarily business debt, then you would not need to undergo the means test.  Part 2 could exempt you if you fall under the specific military service provisions. The specific conditions are if: (1) you are a disabled veteran and incurred debts while on active duty or while performing a homeland defense activity or (2) you are a Reservist/National Guard called to active duty/homeland defense.  

In either case, check the appropriate boxes on the Statement of Exemption from Abuse form and sign in the appropriate space.  Submit this form with the Statement of Current Monthly Income.  

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The Chapter 7 “Means Test” forms can be confusing, but do not let it deter you from pursuing a fresh start. You have options.

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