The bankruptcy "means test" determines whether your income is low enough for you to file for Chapter 7 bankruptcy. It's a formula designed to keep high wage earners from filing for Chapter 7 bankruptcy. High-income filers who fail the means test can use Chapter 13 bankruptcy to repay a portion of their debts, but won't be able to use Chapter 7 bankruptcy to wipe out their debts altogether.

However, having to take the Chapter 7 means test doesn't mean that you must be penniless to use Chapter 7 bankruptcy. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage and car loan payments (although they must be reasonable), taxes, and other expenses. Read on to determine if you can pass the means test and file for Chapter 7 bankruptcy.

How Does the Chapter 7 Means Test Work?

The means test was designed to limit the use of Chapter 7 bankruptcy to those who can't pay their debts. It does this by deducting specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income."

The higher your disposable income, the more likely you won't be allowed to use Chapter 7 bankruptcy. Instead, you’re expected to use your disposable income to repay creditors. (Learn more about calculating your current monthly income for bankruptcy purposes.)

Only bankruptcy filers with primarily consumer debts—not business debts—need to take the means test. The first step of the means test is to determine whether your income is more or less than the median income in your state. If you earn more than the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some of your debt.

Is Your Income More Than the Median?

The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. You're done. You do not need to complete the rest of the means test. You can file for Chapter 7.

Do You Have Enough Disposable Income to Repay Some Debts?

For those whose household income exceeds the state median, the means test computations become more complicated. You must determine whether you have enough income left over (called "disposable income"), after paying your allowed monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot get a discharge by filing for Chapter 7 bankruptcy.

Median income levels vary by state and household size. Also, each county and metropolitan region have different allowed amounts for categories of expenses, such as necessities, housing, and transportation.

(Get more in-depth information on Chapter 7 Bankruptcy Eligibility.)

Business or Consumer Bankruptcy?

Why does it matter whether the bankruptcy is a consumer or business bankruptcy? If you file a Chapter 7 bankruptcy, and your debt is primarily consumer debt, you have to pass the means test to receive a discharge (get your qualifying debts wiped out). However, if your bankruptcy is a business bankruptcy, you get to skip this step. You don’t have to take the means test.

A business bankruptcy is one in which the majority of the filer’s debt is business debt. It’s evident that if a business entity—such as a partnership, limited liability company, or corporation—files for bankruptcy, categorizing the bankruptcy will be straightforward. The filing will be a business bankruptcy.

But it isn’t always that simple. An individual who files a personal case yet operates a business can—and probably will—have business debt and another type, too—consumer debt. If the filer’s debt is primarily consumer in nature, the bankruptcy will be a consumer bankruptcy—even if the filer has some business debt, as well. Whichever type the filer has more of will determine the classification.

Business debt and a profit motive go hand-in-hand. Simply put, you incur business debt while trying to make money. For instance, if you borrow money to buy a food truck, the loan would be of a business nature. The same would hold true if you purchased tools for your construction business.

By contrast, goods and services of a personal nature that you purchased on credit are consumer in nature. For instance, housing expenses, clothing, school supplies for your children, and costs for a gardener, housekeeper, or pool services are all examples of consumer debt.

Use the Chapter 7 Means Test Forms

If you're looking for a way to determine your eligibility under the Chapter 7 means test, try filling out the means test forms. Fillable, downloadable forms are available online on the U.S. Bankruptcy Court’s website. Follow the instructions: they’ve been updated to be more user-friendly.

Here’s where you’ll start:

• Form 122A-1. The first means test form, Chapter 7 Statement of Your Current Monthly Income (Form 122A-1), determines whether your income is below the median income for your state. If it is, you qualify for a Chapter 7 bankruptcy and don’t need to fill out the other two forms.
• Form 122A-2. If your income is above the state median, you still might qualify. You’ll find out by completing the Chapter 7 Means Test Calculation (Form 122A-2). On this form, you’ll deduct allowed expenses and determine whether you have sufficient disposable income to pay into a Chapter 13 bankruptcy plan.
• Form 122A-1Supp. Some people—such as certain members of the military—don’t have to take the means test at all. You’ll fill out Statement of Exemption from Presumption of Abuse Under § 707(b)(2) (Form 122A-1Supp) to determine whether you’re exempt from the means test.

Visit the U.S. Court’s website for the most recent versions the official bankruptcy forms.

Bankruptcy issues often require more in-depth information than what you find in one article. If you need help filling out the bankruptcy forms, it's a good idea to use a self-help book like How to File for Chapter 7 Bankruptcy by Attorney Cara O’Neill and Albin Renauer, J.D., or seek the advice of a knowledgeable bankruptcy attorney. Most offer a free initial consultation.

If You Pass the Chapter 7 Means Test

You should be aware that merely passing the means test doesn't automatically qualify you to file for Chapter 7 bankruptcy. Another step exists. The court will look at two additional forms: Schedule I: Your Income and Schedule J: Your Expenses. If, after deducting your actual monthly expenses from your current monthly income, you have enough remaining to pay something to your creditors, the court might convert (switch) your Chapter 7 case to a Chapter 13 bankruptcy.

Also, just because you qualify under the means test doesn't necessarily mean you should file for Chapter 7 bankruptcy—only that you can. Any decision to file for Chapter 7 bankruptcy should be made after considering alternatives and other factors not discussed in this article. For help, try The New Bankruptcy: Will It Work for You? By Attorney Cara O'Neill.

If You Don't Pass the Chapter 7 Means Test

If you don't pass the means test, you're limited to using Chapter 13 bankruptcy, which requires you to make monthly payments over a three- to five-year period according to a strict budget monitored by the court. Most people who file for bankruptcy prefer Chapter 7, which requires no repayment. However, Chapter 13 bankruptcy is still the best way to handle specific types of problems, like curing a default on a mortgage and repaying debts that won't go away in bankruptcy, such as most taxes and support arrearages. (See When Chapter 13 Is Better Than Chapter 7 Bankruptcy.)

But before you settle on Chapter 13 bankruptcy, be sure to talk to a lawyer. With expert legal advice, you might find that you're able to pass the means test after all.