Chapter 7 Bankruptcy Requirements and Qualifications

Chapter 7 bankruptcy isn't available to everyone. It's for people who don't have funds left over after paying necessary monthly bills. To determine whether you fit into this category, you must pass a test called the means test. If the results show that you can pay back some or all unsecured debt—for instance, credit card balances, overdue utility payments, and medical bills—you'll have to file for Chapter 13 bankruptcy and pay into a five-year repayment plan. If you don't have much left over, you'll have met the requirements to file for Chapter 7 bankruptcy.

Household Income

It's a bit misleading to say that you're eligible to file for Chapter 7 bankruptcy if you "pass" the means test because it's a two-part calculation. The first part of the means test compares your family income to the median income for your state. If yours falls below the median for the size of your family, you've passed and don't need to complete the second part. You'll have met the Chapter 7 requirements.

You can access a median income chart on the Department of Justice website.

Qualifying Expenses

All isn't lost if your family income is higher than the median—you get another chance to pass. The second part of the means test lets you deduct reasonable and necessary expenses from your family income. Any amount left over is your disposable income. If you don't have enough disposable income to pay into a Chapter 13 bankruptcy repayment plan, you meet the Chapter 7 income requirements (more below).

Standard Expenses

The standard expenses are predetermined amounts that represent national and regional averages. You'll find them in charts developed by the Internal Revenue Service. The purpose of the standardized values is to help ensure that a filer living an extravagant lifestyle can't take advantage of a Chapter 7 filing. Here are a few examples:

• food and clothing
• housekeeping supplies and personal care
• healthcare
• some housing expenses and utilities
• standard mortgage or rent expense (or the actual mortgage payment, whichever is higher), and
• transportation costs.

Actual Expenses

You'll be able to use some of your real expenditures, as well, including:

• federal and state income taxes
• employment-related expenses (like union dues, uniforms, required 401(k) contributions)
• life insurance
• court-ordered payments
• childcare
• health insurance
• education expenses for children under 18 (subject to a monthly maximum)
• charitable contributions (up to 15% of gross income), and
• payments for secured debts (such as a house or car payment).

Disposable Income and the Means Test

The amount remaining after deducting all these expenses from your income is your disposable income for the month. You'll multiply that figure by 60 to determine your total disposable income for a 60-month plan.

Next, you'll compare your total disposable income to the means test amounts (these figures are due to be adjusted in 2019):

Passing the Means Test

If the total for 60 months is less than $7,700, you've "passed" the means test.

Failing the Means Test

If the total is more than $12,850, you've "failed" the means test.

Additional Step

If the total disposable income falls between $7,700 and $12,850, the means test adds one more step. It multiplies the total of your nonpriority unsecured debt (like credit cards, medical bills, signature loans) by 25%. If that amount is less than your disposable income, you've "passed." Otherwise, you've "failed."

Example. Your monthly disposable income is $175 or $10,500 for 60 months. Your total nonpriority unsecured debt is $48,000. Twenty-five percent of $48,000 is $12,000. Because your disposable income ($10,500) is less than $12,000, you've passed the means test.

Overcoming the Presumption of Abuse

The court presumes that a debtor who fails the means test is abusing the Chapter 7 bankruptcy process. But you might be able to overcome the presumption of the abuse. To do so, you'll have to show that you have exceptional circumstances that the test doesn't account for, that you have a good reason for expenses that are higher than typically allowed, or that your future income will be less than the amount used for the means test.

An example of exceptional circumstances would be higher than usual expenses experienced by the victims of catastrophic storms. The courts must consider these costs and make other reasonable accommodations for victims filing for Chapter 7 bankruptcy when possible, such as waiving particular document requirements.

Not Qualifying After Passing the Means Test

Many debtors don't realize that you still might not qualify for Chapter 7 bankruptcy after passing the second portion of the means test. Here's why.

The means test is based in part on national and regional averages for certain expenses. In a separate part of your bankruptcy paperwork, you'll provide a list of your actual expenses. If your actual expenses are much less than the means test, you could have more disposable income than the calculation would suggest. Here are two scenarios to illustrate:

• You live at home with your parents and pay no room and board, but you take home $2,500 a month from your job. On the means test, you can deduct a standard amount for food and household expenses, but under these circumstances, you have no real food or household expenses. The court will use your actual disposable income and expect you to pay into a Chapter 13 repayment plan.
• You have a large payment for a luxury item like a loan to finance a timeshare membership. As a secured debt, you can deduct that as an expense on the means test, but the court will likely disqualify it because it isn't a reasonable and necessary expense, freeing up more disposable income.

Your Options If You "Fail" the Means Test

If you fail the means test, you have three options:

Don't File for Bankruptcy

You can choose not to file bankruptcy at all. You can look for alternatives like negotiating lower payments or working with a credit counselor on a debt management plan.

File Chapter 13 Bankruptcy Instead

You can file a Chapter 13 bankruptcy case and propose a plan to pay your debts over a five year period.

Overcome the Presumption of Abuse

You can file a Chapter 7 case and attempt to justify it to the court. If the court rules against you, you can still convert (transfer) your case to Chapter 13 bankruptcy.

Who Must Take the Means Test?

Not everyone. For instance, business entities and certain members of the military are exempt. Individuals whose total debt is primarily business debt (debt incurred while engaging in profit-making activities) also don't need to meet Chapter 7 means test requirements.

A simple way to see if you fit into one of these categories is to read the descriptions on the official bankruptcy form Statement of Exemption from Presumption of Abuse Under § 707(b)(2) (Form 122A-1Supp).