Expenses That Can Help You Pass Bankruptcy's Means Test

If you want to use Chapter 7 bankruptcy to eliminate debt, your income can't exceed the Chapter 7 income limits. If it does, you won't pass the Chapter 7 bankruptcy "means test." If you're a low-income filer, you'll likely qualify for Chapter 7 bankruptcy based on your gross income alone. However, higher-income filers sometimes qualify for Chapter 7 bankruptcy after deducting permitted expenses. Learn more about what you can deduct when your gross income is too high to qualify for Chapter 7.

What Is the Means Test?

The Chapter 7 means test measures your "means" or ability to repay creditors, and it takes many factors into account, including your income from all sources, the state you live in, your family's size, your expenses, personal and business debt, and your military status. Each factor is used in a different part of a three-part test. Depending on your results, you might not need to complete each part.

Is There a Chapter 7 Income Limit?

As for an income limit, there isn't one. Chapter 7 bankruptcy doesn't have one particular "passing" income amount. Instead, the means test considers your entire financial picture to determine whether you're barely scraping by or have money to pay creditors at the end of the month.

How Do I Pass the Means Test?

If you must take the means test (most people are required to), the first part will assess your gross income. You'll probably qualify if you're not earning much and live frugally, but you will likely fail the gross income portion if your income, essential expenses, and "priority debts" are high. However, you could pass the second part, which allows you to reduce your income by deducting certain debts.

You won't qualify for Chapter 7 if you have excess income after subtracting the debts permitted in the second part of the means test. You must use Chapter 13 instead. You'll find specific means test instructions below.

Expenses You Can Deduct on the Means Test

More significant means test deductions are more helpful, so we list more impactful categories (the debts you can expect a bankruptcy lawyer to ask about when qualifying you) toward the top.

• House, car, and other secured debt payments. If you keep your house or car in Chapter 13, you must pay the monthly mortgage or car payment. Because the funds wouldn't be available to pay other creditors in Chapter 13, you can deduct the amount you'd pay over 60 months in Chapter 7. The same applies to other secured debt amounts if you keep the collateral.
• Overdue taxes. Recent tax debt doesn't go away in bankruptcy, and you must fully pay it in Chapter 13. Because an amount equivalent to your nondischargeable tax debt wouldn't be available to other creditors, you can deduct it in Chapter 7.
• Court-ordered payments and arrearages. Domestic support obligations, such as alimony or child support, and other court-ordered payments, including arrearage balances, can be deducted on the means test. The larger the arrearage balance, the more significant the benefit.
• Child care. You can deduct needed babysitting, daycare, or preschool expenses from your means test income.
• Involuntary deductions. These include deductions required for employment, such as mandatory retirement plans, union dues, or uniforms, not voluntary deductions.
• Health, disability, or term life insurance. You can deduct amounts spent on health, disability, or term life insurance. Find out if you should get health insurance before filing for bankruptcy.
• Other healthcare expenses. 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 might be able to deduct the actual amount you pay.
• Education for employment or a disabled child. Education expenses required for employment or your mentally or physically disabled child are deductible.
• Charitable contributions. You can deduct charitable contributions if you made them before bankruptcy and expect to continue. But plan to provide proof of prior payments.
• Care for someone elderly, chronically ill, or with a disability. You can deduct the amount you contribute to caring for these individuals in your household.
• Expenses for special circumstances. Suppose you incur additional expenses for yourself or your family's health and welfare because of special circumstances. In that case, you might be able to deduct them if you explain your situation to the court's satisfaction. Special circumstances might include unusually high expenses after a natural disaster.

These aren't the only expenses that can reduce your income for Chapter 7 purposes. Consider consulting a local bankruptcy lawyer for help.

Three Ways to Pass the Chapter 7 Means Test

Some pass the Chapter 7 means test because they're exempt and don't need to take it. Other filers fall within the income limits set by their state. Some filers have income that exceeds the state limit, but they qualify because they have a lot of allowed expenses and debt.

Here's a simplified way to understand how to meet Chapter 7 financial eligibility requirements.

1. You're exempt. People who qualify automatically don't have to take the means test.
2. You don't make a lot of money. You'll qualify if your gross income is within your state's Chapter 7 bankruptcy income limits.
3. You make a lot, but you're still broke. High-earning individuals with the right type of expenses qualify for Chapter 7 bankruptcy.

You'll find more details below. We explain the easiest qualification method and move on to progressively harder methods. If you get lost, consult a local bankruptcy attorney.

Step 1: Am I Exempt From Taking the Means Test?

Not everyone has to qualify for Chapter 7. If you fall within one of these categories, you'll be exempt from taking the bankruptcy means test.

• Certain military personnel. Disabled military veterans, some reservists, and personnel serving during particular periods are exempt. You'll find the specific criteria on the Statement of Exemption from Presumption of Abuse Under § 707(b)(2)
• Filers with mostly business debt. Current or previous business owners have an advantage when qualifying for Chapter 7 bankruptcy. If, after dividing debt into business-related and consumer debt, the filer's business debt exceeds consumer debt, the filer is exempt from the means test. Learn more about small businesses in Chapter 7.

Some states classify personal tax debt and student loan obligations as business debt, so individual filers in those states might also be able to avoid taking the means test.

Step 2: Is My Income Within Chapter 7 Gross Income Limits?

If you're like most filers, you're not exempt from taking the means test. You'll begin your qualification determination by checking if your gross income is low enough for Chapter 7.

Here's what you need to do.

Calculate Your Yearly Income

The test doesn't consider your yearly income but doubles the total amount you've earned in the last six months. You'll add together all income from every source during the full six months immediately preceding your filing and then multiply that total by two.

Here are examples of the types of income you'll include:

• gross wages, salary, tips, bonuses, overtime, and commissions
• alimony and maintenance payments
• any amounts received from any source, including unmarried partners, roommates, dependents, and parents, and regularly used to pay for household expenses
• net income from a rental or real property, business, profession, or farm
• interest, dividends, and royalties
• unemployment compensation, and
• pension or retirement income.

Find the Chapter 7 Income Limits for Your Filing Year

Here's what you'll do to compare your yearly income to your state's income limits chart.

• Go to the U.S. Trustee Program website.
• Select "Means Testing Information."
• Use the pull-down menu to select the most current figures.
• Click "Median Family Income Based on State/Territory and Family Size."
• Use the table to find your state and family size's qualifying Chapter 7 annual income.

Learn how your household size affects the Chapter 7 means test.

Determine If You Qualify for Chapter 7

You'll pass the means test if your yearly income figure doesn't exceed the allowed amount. Otherwise, take the next portion of the means test.

Step 3: Can I Pass the Means Test By Deducting Expenses?

If your gross income is too high to pass the means test, you'll have another opportunity to qualify. The last section lets you deduct certain expenses from your income.

How the Final Part of the Means Test Works

Essentially, it's a reverse Chapter 13 payment plan calculation determining whether you have enough money to repay creditors in Chapter 13. If none of your creditors would benefit from you filing Chapter 13, you'll qualify for Chapter 7, which explains why you'll deduct the same expenses you'd take in Chapter 13. Not having disposable income after the calculation establishes that you wouldn't be able to pay any of the debts you'd erase in Chapter 7 in Chapter 13.

If you have money remaining or "disposable income," you won't qualify for Chapter 7 and must use Chapter 13 instead. The means test evaluates your income and obligations because bankruptcy law, along with principles of fairness, requires you to utilize any extra funds to repay debts before "discharging" or eliminating them.

Other Chapter 7 Bankruptcy Requirements

Bankruptcy has lots of rules you must follow. For instance, a waiting period must elapse if you've previously filed for bankruptcy. Also, how long you've lived in the state will determine where you file and the bankruptcy exemptions you'll use to protect your property. You'll find many of these rules in state bankruptcy articles.

But that's just the beginning. A local bankruptcy lawyer can explain the bankruptcy requirements applicable to your case.

If You Fail the Chapter 7 Means Test

After deducting all allowed expenses, if you have disposable income that could be used to pay back debt (specifically nonpriority unsecured debts), you won't qualify for Chapter 7 bankruptcy.

The disposable income you'll need must be enough to make it worthwhile for the Chapter 13 trustee to oversee a repayment plan. "One dollar" wouldn't be enough. The disposable income amount changes every three years and is listed at the end of the Chapter 7 Means Test Calculation form.

If you fail the means test, you might be able to use Chapter 13 to discharge debt, but qualifying isn't automatic. Some people make too much for Chapter 7 but don't earn enough to pay the debt filers must pay in Chapter 13.

Find out when Chapter 13 works better than Chapter 7 bankruptcy.

What Is the Chapter 13 Means Test?

Most people assume you want to file for Chapter 7 if you ask about the means test. But technically, Chapter 13 has means test forms too, although the critical question isn't whether you "pass" the means test but whether you propose a plan the bankruptcy court will approve or "confirm." The court will not confirm a Chapter 13 plan unless your creditors receive the amount they're entitled to in bankruptcy.

In addition to determining the amount of disposable income available to pay creditors, the Chapter 13 means test forms determine whether a filer must pay into a three- or five-year plan. Specifically, suppose you qualify for Chapter 7 but decide to file Chapter 13 instead. In that case, you could pay into a shorter three-year plan, and your plan payment requirements wouldn't be as stringent. Filers who don't qualify for Chapter 7 must pay their disposable income into a five-year Chapter 13 plan, assuming they are eligible and can afford the required monthly payment.

From a practical perspective, most filers opt for a five-year Chapter 13 plan because the additional time allows them to pay a more affordable amount over time. Learn more about how long a Chapter 13 plan must last and other Chapter 13 requirements you must meet before the court will approve a proposed Chapter 13 plan.

Need More Bankruptcy Help?

Did you know Nolo has made the law accessible for over fifty years? It's true, and we wholeheartedly encourage research and learning. You can find many more helpful bankruptcy articles on Nolo's bankruptcy homepage. For instance, Nolo articles will explain what bankruptcy can do, what you'll want to avoid before filing for bankruptcy, and more. Information needed to complete the official downloadable bankruptcy forms is on the Department of Justice U.S. Trustee Program website.

However, online articles and resources can't address all bankruptcy issues and aren't written with the facts of your particular case in mind. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.