Almost all debtors filing for Chapter 7 bankruptcy must pass the “means test.” However, there are a few instances when a debtor can qualify for Chapter 7 bankruptcy without taking the means test.
Read on to learn about the means test and the exceptions to the means test requirement.
What Is the Means Test?
In 2005, Congress added the means test to the Chapter 7 bankruptcy eligibility requirements. The means test is meant to keep higher-income filers from qualifying for Chapter 7 bankruptcy. Instead, those filers must repay some of their debt in a Chapter 13 bankruptcy.
If your income is lower than the state median income, you qualify for Chapter 7 without going further. However, if your income is higher than your state’s median income, you must pass the means test, which compares your income to certain allowable expenses to see if you can repay a certain portion of your unsecured debt. (For details on the means test, see the articles in The Means Test & Other Chapter 7 Eligibility Issues.)
If you don’t have to take the means test, there’s no need to worry about how high your income is, or how it relates to your expenses.
Exceptions to the Means Test
There are three situations when you don’t have to pass the means test in order to qualify for Chapter 7 bankruptcy.
Your Debts are Primarily Non-Consumer Debts
If more than 50% of your debts are non-consumer debts you are excused from the means test requirement. Non-consumer debts generally refer to business debts – those debts that you incurred for your business or with profit motives in mind. However, some courts consider personal income tax debts to be non-consumer debts too.
(To learn more about the difference between consumer and business debts, see The Business Debt Exception to the Chapter 7 Means Test.)
If you are a disabled veteran and your debts were incurred primarily while you were on active duty or engaged in homeland defense activities, you don’t have to pass the means test. To qualify for this exclusion, you must have a disability rating of at least 30%.
Military Reservists and the National Guard
The final exception to the means test requirement is for members of the military reserve or National Guard for the period they are on active duty and for 540 days thereafter, as long as they were on active duty or performing homeland defense activities for at least 90 days. Once the exclusion period ends, if the time has not passed for objections to the means test qualification in your bankruptcy case, you will have to take and pass the means test.