Expenses That Can Help You Pass Bankruptcy's Means Test

If you want to use Chapter 7 bankruptcy to get rid of debt, your income can't exceed the Chapter 7 income limits or 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, even higher-income filers sometimes qualify for Chapter 7 bankruptcy after deducting high-priority expenses.

But working with the Chapter 7 means test can get complicated quickly. To simplify the process, consider learning:

• the three ways you can qualify for Chapter 7
• how to check if you meet Chapter 7 income limits, and
• the expenses that help earners pass the means test.

If you already know your gross income is too high to qualify for Chapter 7 and want to know which expenses will help you pass, skip to the "Expenses That Will Help You Pass the Means Test" section below.

What Is the Chapter 7 Bankruptcy 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 at the end of the month to pay creditors.

Chances are you'll qualify if you're not making much and living frugally or if your income, essential expenses, and "priority debts" are high. People who won't qualify for Chapter 7? Those with excess income after paying allowed debts. They'll have to use Chapter 13 instead.

How Do I Pass the Chapter 7 Means Test?

The Chapter 7 means test measures your "means" or ability to pay back 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.

What Are the 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. And 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 the three ways you can 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 first and move on to progressively harder methods. If you get lost, consult with 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 Income Limits?

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

Here's what you'll do.

Calculate Your Yearly Income

The test doesn't look at your true yearly income but instead doubles the amount you've earned over the last six months. You'll add all income earned from all sources during the full six months immediately before filing and multiply the amount 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, farm
• interest, dividends, and royalties
• unemployment compensation, and
• pension or retirement income.

Find the Chapter 7 Income Limits for 2021 or 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 the qualifying Chapter 7 annual income for your state and family size.

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

It's a reverse Chapter 13 payment plan calculation. You'll deduct the same expenses you'd take in Chapter 13.

If you have money remaining, or "disposable income," you won't qualify for Chapter 7 and must use Chapter 13 instead. Why? Because fairness (and bankruptcy law) requires you to use the extra money to repay debts instead of "discharging" or wiping them out in Chapter 7.

If you don't have any disposable income, you wouldn't be able to pay any of the debts you'd erase in Chapter 7 in Chapter 13. Because none of your creditors would benefit from forcing you into Chapter 13, you'll qualify for Chapter 7.

Expenses That Will Help You Pass the Chapter 7 Means Test

Larger 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 towards the care of these individuals in your household.
• Expenses for special circumstances. Suppose you incur additional expenses for you 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.

What Happens If I 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 amount of 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. Learn when Chapter 13 is 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. Chapter 13 means test forms determine whether a filer must pay into a three- or five-year plan and the amount of disposable income available to pay creditors.

Specifically, suppose you qualify for Chapter 7 but decide to file Chapter 13 instead. In that case, you'd be able to 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 all of their disposable income into a five-year plan.

From a practical perspective, most filers opt for a five-year Chapter 13 plan because the additional time lets the filer pay a more affordable amount over time. Learn more about how long a Chapter 13 plan must last.

What Happens If You Fail the Chapter 13 Means Test?

When filing for Chapter 13, the key question isn't whether you "pass" the means test but whether you propose a plan the bankruptcy court will approve or "confirm." The court won't confirm a Chapter 13 plan unless your creditors get the amount they're entitled to receive in bankruptcy.

Learn more about the Chapter 13 confirmation hearing.

Satisfying 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.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.