What Is the Means Test for Bankruptcy?
Not every debtor is eligible for bankruptcy under Chapter 7. A debtor must pass the "means test" to file for Chapter 7 bankruptcy protection. The means test is an objective standard of measuring whether a debtor can discharge all eligible debt under Chapter 7 bankruptcy, or whether the debtor can repay creditors in a Chapter 13 repayment plan.
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Median Income
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A debtor will pass the means test if his income falls below the median income in his state. Under the bankruptcy code, a debtor's income is the average monthly income earned six months before filing for bankruptcy. A debtor who passes the means test is eligible for Chapter 7. Income sources include wages, tips, commissions, income from a business, unemployment compensation, pension and retirement income, and rents and real property income.
Disposable Income
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Even if a debtor earns more than a state's median income, she still might qualify for Chapter 7 bankruptcy. If she does not have enough disposable income (income minus reasonably allowable expenses) to pay unsecured creditors in a Chapter 13 repayment plan, she might pass the means test. If she can repay some amount to unsecured creditors, the debtor will fail the means test.
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Special Circumstances
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A debtor who fails the means test might be eligible for Chapter 7 bankruptcy if special circumstances exist. Special circumstances include recent unemployment or a serious medical condition. The bankruptcy court will require the debtor to provide documentation of the expense or income adjustment. If the bankruptcy court accepts the documentation, the debtor is eligible for Chapter 7 if he is able to pass the means test.
Exclusions
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Under certain circumstances, the means test does not apply to disabled veterans. A veteran may circumvent the means test if the following conditions apply: the debt was incurred while serving on active duty or while serving in homeland defense activities, the veteran has a disability rating of at least 30 percent, and the veteran acquired more than half of the debt while on active duty or serving in homeland defense.
Failing the Means Test
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If a debtor fails the means test and special circumstances are inapplicable, she is eligible only for Chapter 13 bankruptcy. In Chapter 13, the debtor must repay debts in a court-approved five-year plan. However, if a debtor expects her income to decrease, she can wait a few months and take the means test again.
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