Even if you make too much money to automatically pass the Chapter 7 means test, you may still be able to qualify for Chapter 7 bankruptcy. This is because you can deduct certain expenses in full to help you reduce your disposable income on the means test. Read on to learn more about which expenses can help you pass the means test and qualify for Chapter 7 bankruptcy.
(Learn more about the Chapter 7 means test.)
Your Income Determines Whether the Entire Means Test Must Be Completed
When determining whether you qualify for Chapter 7, the means test compares your average gross monthly income for the six month period prior to filing to the median income of a similar household in your state. (Learn more about calculating your income for the means test.) Here is how it works.
If your income is below the state median, you automatically pass and are not required to complete the rest of the form. This is because the means test presumes that low-income debtors do not have the means to pay back their unsecured creditors and are not abusing the system by filing for Chapter 7. However, if you have above-median income, you must complete the rest of the means test and disclose your expenses to determine whether you qualify. (To learn how to find your state's median income and to compare it to your income, see Comparing Your Income to the State Median Income for the Means Test.)
Using Your Expenses to Pass the Means Test
If you have enough disposable monthly income to pay back unsecured creditors, you won’t qualify for Chapter 7 bankruptcy. As a result, if your income is high, your expenses must also be high to pass the means test.
To determine your disposable income, the means test requires debtors to use national and local standards for most living expenses, rather than the actual amount of the debtor's expenses. Otherwise, debtors could simply claim they do not have the money to pay back creditors because they wear name brand clothing or eat at expensive restaurants.
But you are still allowed to claim your actual expenses for certain things. These deductions include obligations you are required to pay as well as expenses necessary for your health and welfare. As a result, these expenses may sufficiently reduce your disposable income to qualify you for Chapter 7 bankruptcy.
Expenses That May Help You on the Means Test
The following are some of the most common obligations for which you are allowed to deduct your actual expenses on the means test. If you have high expenses in some of these areas, it may help you pass the means test.
Since you normally have to pay taxes on your income, you can deduct your tax obligations from your income on the means test as well.
These include deductions required for employment such as mandatory retirement plans, union dues, or uniforms.
Health, disability, or term life insurance
You are allowed to deduct the actual amounts you spend on health, disability, or term life insurance expenses. (See Should I get health insurance before I file bankrutpcy? and Can I deduct life insurance premiums on the means test?)
Secured debt payments
These include payments on secured debts such as your mortgage or car loan. Even if your mortgage or car payment is above the national or local living standards, you can normally deduct it in full on the means test. However, the means test looks at the total amount you will have to pay in the 60 months following the bankruptcy and averages your monthly obligation based on that amount. So if your car or mortgage will be paid off in less than 60 months, you can only deduct the 60-month average and not your entire current monthly payment.
Court ordered payments
If you are required to pay domestic support obligations such as alimony or child support, you can deduct these expenses on the means test.
If you incur more out-of-pocket health care costs (other than insurance) for the health and welfare of you or your dependents than the allowed national standard, you may be able to deduct the actual amount you pay. (More on deducting medical expenses for a family member.)
Education for employment or disabled child
You can deduct your education expenses if those expenses are required for your employment or for your mentally or physically disabled child.
If you regularly made charitable contributions prior to bankruptcy and expect to continue making those contributions, you can deduct them on the means test. (Get details on deducting charitable donations on the means test.)
Care of elderly, chronically ill, or disabled
You can deduct the amount you contribute towards the care of an elderly, chronically ill, or disabled family member or person in your household. (Learn more about ABLE contributions for a disabled child and the means test.)
Expenses for special circumstances
If you incur additional expenses for you or your family’s health and welfare because of special circumstances, you may be able to deduct them if you explain your situation to the satisfaction of the court.