Before you file for Chapter 7 bankruptcy, you have to make sure you're eligible. The bankruptcy means test sets income limits for folks looking to get a fresh start under Chapter 7. Keep reading to learn more about the Chapter 7 income limits and the bankruptcy means test.
Before 2005, anyone could file for Chapter 7 bankruptcy relief. They had to prove that their reasonable expenses created a negative income to remain in a Chapter 7 case. That is not the case now. Chapter 7 income limits restrict who qualifies to file under Chapter 7.
The Bankruptcy Abuse Prevention and Consumer Act of 2005 (BAPCPA) changed the qualifications for debtors to obtain a bankruptcy discharge under Chapter 7. If you do not pass a Means Test, you probably do not qualify to file under Chapter 7.
There are a few exceptions to the Chapter 7 income limits, such as debtors whose debt is primarily business debt. For many debtors, if their disposable income exceeds the Chapter 7 income limits, there is a more involved process to receive a bankruptcy discharge under Chapter 7.
What is the Means Test?
The Means Test is the document used to determine if a debtor exceeds the Chapter 7 income limits. This will be one of many documents you’ll have to fill out. The Means Test has two parts.
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First Section of the Means Test
In the first part of the Means Test, you compare your average monthly income to the median income in your area. The median income is based on a household of the same size. The median income amounts are adjusted periodically to calculate the Chapter 7 income limits.
To find out if your income is below the Chapter 7 income limits, register with Upsolve, a nonprofit whose mission is to help low-income Americans get a fresh start by filing Chapter 7. Upsolve’s services are provided at no cost to you.
Second Section of the Means Test
If your income exceeds the median income for your area, you “fail” the first section of the test. However, there is a second section of the test to determine if you are below the Chapter 7 income limits.
The second section of the Means Test calculates your disposable income. Your disposable income is the money you have at the end of each month to pay toward your debts.
However, you cannot subtract any expense that you consider valid from your income. The expenses must be “reasonable” according to the guidelines. Your expenses must also be “allowed.” Some expenses are not allowed.
After subtracting your reasonable and allowed expenses from your monthly income, if the figure is negative, you do not exceed the Chapter 7 income limits. You can proceed with filing for bankruptcy relief under Chapter 7.
However, if your income is positive, you have disposable monthly income (DMI). You must determine if the amount exceeds the Chapter 7 income limits for disposable income.
Your disposable income for a Chapter 13 plan is based on your DMI multiplied by 60 (most Chapter 13 plans are 60 months). If this amount exceeds a certain amount, you probably do not qualify for a bankruptcy discharge under Chapter 7.
Getting Help with the Means Test
Completing the Means Test can be challenging. It can be difficult to decide if your income is below the Chapter 7 income limits.
Do not panic! Upsolve is here to help you. If you need help with the Means Test, take our screener to start Upsolve’s free bankruptcy process.
Upsolve is a Harvard Law School-grown nonprofit that provides Chapter 7 bankruptcy services at no cost. Watch past users explain how our service works. Then let us take you through the process of determining whether your income is below the Chapter 7 income limits.
If you qualify for a bankruptcy discharge under Chapter 7, you can start your journey on the road to a debt-free life. You can have better financial well-being in as soon as four to six months.