The bankruptcy "means test" determines whether your income is low enough for you to file Chapter 7 bankruptcy. It's a formula designed to keep filers with higher incomes 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 in order 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 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.
The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly 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. (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. To take the means test, you must first 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.
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. Period. You're done. You do not need to complete the rest of the means test. You can file for Chapter 7.
For those whose household income exceeds the state median, the means test computations get significantly more complex. 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 file for Chapter 7 bankruptcy.
Median income levels vary by state and household size, and each county and metropolitan region have different allowed amounts for categories of expenses: basic necessities, housing, and transportation. But don't worry; you can get through the math with the help of an online calculator.
Get more in-depth information on Chapter 7 Bankruptcy Eligibility.
If you're looking for an easy way to determine your eligibility under the Chapter 7 means test, visit legalconsumer.com and use its online bankruptcy means test calculator, created by one of the authors of Nolo's book How to File for Chapter 7 Bankruptcy, Albin Renauer, J.D. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.
You'll have to supply some income and expense information, but the calculator will save you the trouble of looking up income and expense figures for your area and doing the math. And, if you decide to file for Chapter7 bankruptcy, you can use these figures on your official paperwork (the calculator closely follows the format of the official means test forms 122A-1 and 122A-2 that you must complete when you file for bankruptcy).
You should be aware that simply passing the means test doesn't automatically qualify you to file for Chapter 7 bankruptcy. Another step exists. The court will look to 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 a significant amount remaining that could go to pay to your creditors, your Chapter 7 case might be converted 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 -- merely that you can. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and other factors discussed in other articles on this website or in Nolo's The New Bankruptcy: Will It Work for You? by Attorney Cara O'Neill.
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.