What is the Means Test relative to Chapter 7 Bankruptcy?

Means Test Chapter 7 Bankruptcy

If you have spent any amount of time research debt reduction, liquidation or bankruptcy, you have undoubtedly come across the Bankruptcy Terminology, Means Test.

In short, the basic lawyer definition of Means Test – Section 707(b)(2) of the Bankruptcy Code applies a “means test” to determine whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor’s aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor’s nonpriority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.

What does that even mean, Means Test?!?! English Please

The “means test” is a simple formula that determines whether your income and assets are low enough for you to file Chapter 7 bankruptcy. The idea is to keep filers with higher incomes from filing for Chapter 7 bankruptcy as a way to volunteered wipe out debt when they have the means to repay. Those who fail the means test may use a Chapter 13 bankruptcy to repay a portion of their debts, but may not utilize the Chapter 7 bankruptcy to wipe out their debts altogether.

You do not need to be penniless to file Chapter 7 bankruptcy. You can earn a regular income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses piling up like a high mortgage, car loan payments, taxes, and other expenses. Remember, even Donald Trump has filed for corporate bankruptcy!

How Does the Chapter 7 Means Test Work?

The means test was specifically designed to restrict access to chapter 7 bankruptcy to those that truly can not afford to repay their debts. You can roughly calculate yourself, deduct specific monthly expenses from your current monthly income (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy.

The means test is primarily for those with consumer debts, not business debts.

Is Your Income More Than the Median?

The first test is the most simple: Does your current monthly income fall below the median income for a household of your size, in your state? If yes, you pass. You are done. You are eligible to file for Chapter 7 bankruptcy.

If you earn more than the median, you must figure out if your disposable income, income after subtracting certain expenses, can repay some of your debt.

Do You Have Enough Disposable Income to Repay Some Debts?

If your household income exceeds the state median ($41,262 in Arkansas in 2014), the means test gets significantly more complex. Does your disposable income, money after paying your “allowed” monthly expenses, equal enough to pay off a portion of your unsecured debts like credit cards and medical bills. If disposable income exceeds a percentage amount, you fail the means test and must use Chapter 13 bankruptcy.

Each county in Arkansas has different allowences for expenses: basic necessities, housing, utilities, and transportation. We can assist or you can utilize online calculators for a guesstimate.

Use a Chapter 7 Means Test Online Calculator

Legalconsumer.com offers an online bankruptcy means test calculator. This calculators asks for no identifying information outside of your zip code. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state by number of household members, county, and region to determine your eligibility.
You must supply income and expense information, but the tool will save you the time and mistakes of looking up the income and expense figures specific to your Arkansas county and doing the math calculations. Keep these numbers handy, you’ll need them for the official forms when you come into your attorney’s office. This tool should only be used as an estimate!

After you pass the Chapter 7 bankruptcy Means Test

Just because you can file Chapter 7 does not mean you should file for Chapter 7 bankruptcy! Please discuss with an attorney. The Flynn Law Firm offers free consultations to discuss the specific options. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors discussed as bankruptcy can have long term consequences.

If You Don’t Pass the Chapter 7 Means Test, there is still hope

So the means test didn’t qualify you for a chapter 7 bankruptcy. You are limited to file Chapter 13 bankruptcy which requires you to make monthly payments over a three to five year period with strict budget monitored by the local courts. Most people prefer Chapter 7, which requires no repayment, but it is not always the best option anyway. Chapter 13 bankruptcy is the best way to handle issues like a default on a mortgage.

Before you decide or settle on bankruptcy, be sure to talk to a lawyer. With expert legal advice, you may find that you are able to easily pass the means test. We will be able discuss all of your options specific to your unique needs.