If you’re a low-income filer, you’ll likely qualify for Chapter 7 bankruptcy based on your gross income alone. Even if you make too much money to pass the Chapter 7 means test automatically, you might still be able to qualify for Chapter 7 bankruptcy. The two-part means test allows you to deduct certain expenses in full to reduce your disposable income. Read on to learn more about which expenses can help you pass the means test and qualify for Chapter 7 bankruptcy—or whether you can avoid taking the means test altogether.

(Learn more about the Chapter 7 bankruptcy means test.)

Your Income and the Means Test

When determining whether you qualify for Chapter 7 bankruptcy, the means test compares your average gross monthly income for the six-month period before filing to the median income of similar households in your state. (Learn more about calculating your income for the means test.) Here is how it works.

You’ll automatically pass if your income is below the state median (you’ll use your gross income for this calculation). The means test presumes that low-income debtors can’t pay back creditors and therefore, aren’t abusing the system by filing for Chapter 7 bankruptcy.

However, if your income is above the median, you don’t automatically fail, either. You’ll complete the rest of the means test and subtract allowed expenses from your gross income. If the amount that remains isn’t enough to make a meaningful payment to your creditors, you’ll still qualify for a Chapter 7 discharge.

(To learn how to find your state's median income, see Comparing Your Income to the State Median Income for the Means Test.)

Are You Required to Take the Means Test?

If you’re filing a consumer bankruptcy—and you likely are—then yes, you’ll need to take the means test. (See the exclusion criteria on Statement of Exemption from Presumption of Abuse Under § 707(b)(2) if you’re a disabled military veteran or reservist.) But, on occasion, an individual who doesn’t own a business (or a sole proprietor) will still qualify to file a Chapter 7 business bankruptcy, escape the means test, and be able to discharge qualifying debt even though the filer wouldn’t pass the means test.

Determining whether yours is a consumer or business bankruptcy starts with figuring out whether your debts are primarily consumer or business debt. Consumer debt is incurred for personal, family, or household purposes and includes:

• residential rent or a mortgage balance
• household utilities and cable bills
• food (such as groceries and restaurant meals)
• clothing for yourself and your family
• a movie, play, or other entertainment, and
• a personal or family vacation.

By contrast, business debt arises from a profit motive. For instance, suppose that you want to give homemade vases as holiday gifts, so you take out a loan to purchase pottery-making supplies. The loan would be a consumer debt. However, if the vases turn out exceptionally well and you decide to sell them at a local music venue instead, the loan would be a business debt.

Here’s where the loophole comes in. Personal tax debt and student loan obligations are usually considered business debt (check the laws in your state). People with large balances might qualify as an individual filing for a business bankruptcy and avoid taking the means test. Because this sort of filing can get tricky, it’s a good idea to consult with a local bankruptcy lawyer who knows how your court will handle particular types of debt.

Using Your Expenses to Pass the Means Test

If you have enough disposable monthly income to pay back unsecured creditors, you won’t qualify for Chapter 7 bankruptcy. As a result, if your income is high, your expenses must also be high to pass the means test.

The means test requires debtors to use national and local standards for most living expenses, rather than the actual amount of the debtor's expenses. Otherwise, debtors could just claim they don’t have the money to pay back creditors because they wear name brand clothing or eat at expensive restaurants.

But you are still allowed to claim your actual expenses for certain things. These deductions include obligations you’re required to pay as well as expenses necessary for your health and welfare. As a result, these expenses may sufficiently reduce your disposable income to qualify you for Chapter 7 bankruptcy.

Expenses That Might Help on the Means Test

The following are some of the most common obligations you can deduct from your actual expenses on the means test. If you have high expenses in some of these areas, it may help you pass the means test.

• Taxes. Since you normally have to pay taxes on your income, you can deduct your tax obligations from your income on the means test.
• Involuntary deductions. These include deductions required for employment such as mandatory retirement plans, union dues, or uniforms. You can’t claim items that you have deducted from your pay voluntarily.
• Health, disability, or term life insurance. You are allowed to deduct the actual amounts you spend on health, disability, or term life insurance expenses. (See Should I get health insurance before I file bankruptcy?)
• House, car, and other secured debt payments. A secured debt payment is one in which the creditor has a right to reclaim collateral—such as a car or house—if you fail to make your payment. Even if your mortgage or car payment is above the national or local living standards, you can normally deduct it in full on the means test. However, the means test looks at the total amount you will have to pay in the 60 months following the bankruptcy and averages your monthly obligation based on that amount. So if your car or mortgage will be paid off in less than 60 months, you can only deduct the 60-month average and not your entire current monthly payment.
• Court-ordered payments. If you are required to pay domestic support obligations such as alimony or child support, you can deduct these expenses on the means test.
• Child care. Expenses for needed child care such as babysitting, daycare, or preschool can be deducted from your income on the means test.
• Healthcare. 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 may be able to deduct the actual amount you pay.
• Education for employment or a disabled child. You can deduct your education expenses if those expenses are required for your employment or your mentally or physically disabled child.
• Charitable contributions. If you regularly made charitable contributions before bankruptcy and expect to continue making those contributions, you can deduct them on the means test. For instance, it’s common to deduct tithing, but expect to provide proof of prior payments.
• Care of a person who is elderly, chronically ill, or has a disability. You can deduct the amount you contribute towards the care of an elderly, chronically ill, or disabled family member or person in your household. (See Household Size and the Chapter 7 Means Test.)
• Expenses for special circumstances. If you incur additional expenses for you or your family’s health and welfare because of special circumstances, you might be able to deduct them if you explain your situation to the satisfaction of the court. Special circumstances might include unusually high expenses after a natural disaster.

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