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Under the current bankruptcy law, people who file for Chapter 7 must pass what is known as the "Chapter 7 means test":
The new bankruptcy law is designed to make sure that Chapter 7 bankruptcy protection is given to those who most need it. The means test is the qualifying step for those looking for file Chapter 7.
The Chapter 7 means test is a formula applied to determine whether or not the consumer should have enough money available to make some minimal payment to creditors in a Chapter 13 bankruptcy plan. In most cases, those who want to file Chapter 7, can.
The court's goal is to reserve Chapter 7 for those who have no means to repay their debts. Prior to the law change, there were less eligibility restrictions on who could wipe out credit card debts, medical bills and most personal loans through Chapter 7 bankruptcy, regardless of their ability to repay their debts.
Curious if Chapter 7 is right for you? Talk to a bankruptcy lawyer about your eligibility to file bankruptcy under Chapter 7 or 13:
The first step in the Chapter 7 bankruptcy means test is simple: it compares your income to the median income in your state for a family the same size as yours.
The median income for your family size may differ dramatically depending upon where you live, and a local bankruptcy lawyer can tell you whether you are above or below the applicable median income.
Check out our state median incomes table for more information.
If your income is higher than the median income, it doesn't necessarily mean that you can't file for Chapter 7 bankruptcy; it just triggers the second step in the test.
The second step is a bit more complicated, and actually breaks down into separate pieces itself.
Certain allowable expenses (determined by IRS guidelines) are subtracted from your income to find your "disposable income."
If your projected disposable income over the next five years totals less than $6,000 ($100/month), you likely "pass" and can file under Chapter 7.
If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don't really need to file for Chapter 7 bankruptcy and you may only be allowed to do so if you can demonstrate special circumstances.
In the gray area between $6,000 and $10,000, yet another calculation is often required.
This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible.
If your disposable income over that five years is greater than 25 percent of your unsecured, non-priority debts, you'll probably find yourself in the same circumstances as if you'd had more than $10,000 in disposable income.
If your disposable income over a five year period is less than 25 percent of your unsecured, non-priority debts, you will likely "pass" the means test.
A local bankruptcy attorney can crunch the numbers for you and tell you whether or not you qualify for Chapter 7 bankruptcy under the means test.
The calculation can be complex, not only because of the numerous steps that may be involved, but because it requires an understanding of the rules concerning how your income is calculated for means test purposes and which debts are classified as unsecured and non-priority.
Most people who want to file for Chapter 7 bankruptcy find that they are still eligible to do so. A local bankruptcy attorney can help you determine how the means test may affect your bankruptcy options.
Please remember that while million of Americans have filed for bankruptcy, each case is different. A local attorney can help you determine if you may qualify for Chapter 7, if Chapter 13 could be a better option, or if some other debt relief action may be better for you.
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The above summary is not legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.
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