When you file for Chapter 7 or Chapter 13 bankruptcy, you must compare your family income to the median income in your state for the same household size. In Chapter 7 bankruptcy, this is an important part of the means test—the test you must pass to receive debt forgiveness (a discharge). In Chapter 13 bankruptcy, this is important in determining how long your repayment plan will last and the expense figures you can use.
(Learn how to calculate your family income in "Current Monthly Income" for the Bankruptcy Means Test.)
Family median income figures are published for all 50 states several times per year (so you’ll want to check for the most recent figures). To compare your current monthly income to the family median income for your state, you’ll need to multiply your current monthly income by 12 (or divide the annual family median income figure by 12). You’ll use gross figures (pretax), not what’s left after subtracting taxes and other deductions.
Example. John and Marcia are married and have two young children. Their current gross monthly income is $5,400. Their annual gross income would be $64,800 ($5,400 multiplied by 12).
Once you’ve got your annual gross income, you’ll compare it to the state family median income for your family size (find out where to get this amount below) to see whether it’s more or less than the median.
Do You Need to Take the Means Test?
When filling out your Chapter 7 bankruptcy forms, you’ll explain whether your debt is primarily consumer or business in nature. Individuals with more business debt than consumer debt are exempt from the means test (as well as certain veterans and other military personnel). If you have consumer debt primarily, you’ll have to pass the “means test” to qualify for a Chapter 7 discharge.
Those with primarily business debts (debts incurred to make a profit) will file a business bankruptcy. Although companies mainly use this form of bankruptcy, individuals sometimes have enough business debt to qualify.
For instance, if you are a sole proprietor and your debts are primarily business in nature, you won't have to take the means test. Also, keep in mind that personal income tax debt is considered business debt. And some courts characterize student loans as business debt, too.
By contrast, consumer debt is an obligation that you incur for personal reasons for things like housing, food, clothing, or entertainment. Consumer debts often include:
- mortgage balances
- utility bills for the home, and
- credit card purchases for personal items.
If you’re unclear about the type of debt you have, you should meet with a local bankruptcy lawyer. A bankruptcy attorney can review your case and explain which bankruptcy chapter will best meet your needs—and the first consultation is often free.
You can find the most recent family median income at the website of the U.S. Trustee at https://www.justice.gov/ust (select "Means Testing Information" and then choose the correct filing date from the drop-down menu.)
To find out who is included in your household size for purposes of the means test, see Household Size and the Chapter 7 Means Test.
Although the U.S. Census Bureau generates median figures for families that have up to seven members, Congress does not want you to use these figures if you have a larger family. The Census figures are for families that have up to four members. If there are more than four members of your family, you must add a set amount per additional person to the four-member median income figure for your state.
The figures in the Median Family Income chart change about regularly, so be sure you are using the most recent chart. You can pretty much rely on the figures going up slightly; however, be aware that the median income can decrease, as well.
Learn more about The Bankruptcy Means Test.