The Chapter 7 Bankruptcy Means Test - What Do You Need to Know About It?
In this section of Total Bankruptcy, you will learn about:
- the Chapter 7 bankruptcy means test;
- the two steps in the Chapter 7 bankruptcy means test;
- sorting out the means test; and
- where you can study the Chapter 7 means test in more detail.
What is the Chapter 7 Bankruptcy Means Test?
Beginning in October of 2005, people who want to file for Chapter 7 bankruptcy have to pass what is known as the "Chapter 7 means test". 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. The goal is to reserve Chapter 7 bankruptcy for those who really have no means to pay, and to push those who have available income into Chapter 13 bankruptcy plans, so that their creditors will receive at least partial payment.
The Means Test is a Two Step Process
Step One: Median Income Comparison
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.
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.
Step Two: Calculating Disposable Income and Unsecured Debts
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 "pass" and can file under Chapter 7.
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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 will only be allowed to do so if you can demonstrate special circumstances.
In the grey area between $6,000 and $10,000, yet another calculation is 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% of your unsecured, non-priority debts, you 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% of your unsecured, non-priority debts, you "pass" the means test.
You Don't Have to Sort Out the Means Test Alone
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, which debts are classified as unsecured and non-priority, and a knowledge of the IRS allowable expense figures in various categories.
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 affects your options.
Study for the Chapter 7 Means Test in More Detail!
Need more legal information on the Chapter 7 means test? Take a look at our Chapter 7 Means Test law library page. And if you have any other questions about the Chapter 7 means test, speak to an experienced bankruptcy attorney as soon as possible. Get started by filling out our free bankruptcy case evaluation form, and we'll help you schedule a free, no-obligation consultation with a local bankruptcy attorney.