What Is a Means Test for Chapter 7?
There are two types of personal bankruptcy filings--Chapter 7 and Chapter 13. To qualify for a Chapter 7, which cancels all debts, you must pass a financial means test. The means test identifies those who qualify to file for Chapter 7 bankruptcy (those who really have no way to pay), and forces those who have available income into Chapter 13 bankruptcy repayment plans.
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About Means Testing
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In a Chapter 7 bankruptcy, your creditors---with some exceptions such as student loans---receive no type of payment whatsoever. A Chapter 7 bankruptcy tells them that you have no money at all and that it is impossible for you to repay them. The means test is how the bankruptcy court determines if you have enough money to enter into a formal repayment schedule, which is what happens in a Chapter 13 bankruptcy.
Step One
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In the first step of the means test, the court compares your annual income to the median annual income of the same size family in your state. Because this is based on state incomes, there is some variance from state to state. Depending on your specific situation, if your income is significantly lower than the median, you may be able to file for Chapter 7 bankruptcy immediately. If your income is higher than the median income for your state, then you go to the next step.
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Step Two
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The second step determines the amount, if any, of disposable income you have at the end of each month--money that could help pay back your creditors. The court takes your monthly income and subtracts all the allowable expenses (in accordance with IRS guidelines). A total disposable income of less than $6,000 over the next five years gives you a strong chance of passing the means test and allowing you to file Chapter 7. If your total disposable income is greater than $10,000, it will likely prohibit you from filing Chapter 7 bankruptcy.
Gray Area
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If your total disposable income over the five-year period falls between $6,000 and $10,000, the court may take your total disposable income for the five-year period and compare it as a percentage of your unsecured debt to determine if any significant repayment options are possible. If the percentage is less than 25, then it is highly possible that you will pass the means test. A percentage greater than 25 percent will likely mean that you do not pass and will not be able to file for Chapter 7.
Credit Counseling
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The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 requires that all potential filers of bankruptcy, including Chapter 7, undergo a credit counseling briefing process with a provider of credit counseling services. This provider of services must be approved by the U.S. Trustee's office. Failure to comply with this mandate may result in the dismissal of your bankruptcy filing.
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