What Is The Bankruptcy Means Test?

The bankruptcy means test is a calculation used to determine whether an individual qualifies for filing under Chapter 7 bankruptcy, which is designed to discharge most debts without requiring repayment. Introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the means test aims to prevent individuals with higher incomes from filing for Chapter 7 bankruptcy if they have the ability to repay some of their debts under Chapter 13 bankruptcy.

How the Means Test Works

The means test involves two main steps to assess your financial situation:

1. Comparing Your Income to the Median Income: The first step compares your average monthly income over the six months before filing for bankruptcy to the median income for a household of your size in your state. If your income is below the median, you automatically qualify for Chapter 7 bankruptcy. The median income figures are updated periodically and can be found on the U.S. Trustee Program’s website.
2. Detailed Income and Expense Analysis: If your income exceeds the state median, the means test proceeds to a more detailed analysis of your income and expenses. This includes allowable expenses, such as living costs, taxes, health care, education, and childcare, among others, to determine your disposable income. If the calculation shows that you have sufficient disposable income to repay a portion of your unsecured debts, you may not qualify for Chapter 7 bankruptcy and might have to file under Chapter 13 instead.

Exceptions and Special Considerations

• Disabled Veterans: Disabled veterans who incurred most of their debt while on active duty or performing homeland defense activities may be exempt from the means test.
• Non-Consumer Debts: If more than half of your debts are non-consumer debts (such as business debts), you may be exempt from the means test.
• Recent Changes in Income: If your income has recently decreased, this may affect your means test calculation. It’s important to accurately report any changes in your financial situation.

Importance of Accurate Information

Providing accurate and complete financial information is crucial when completing the means test. Errors or omissions can lead to delays, dismissal of your bankruptcy case, or even allegations of bankruptcy fraud.

The bankruptcy means test is a critical step in the process of filing for Chapter 7 bankruptcy, designed to ensure that those who can afford to repay their debts do so under Chapter 13 bankruptcy. Understanding how the means test works and accurately reporting your income and expenses can help you navigate the bankruptcy process more smoothly. Given the complexity of the means test and bankruptcy law in general, consulting with a knowledgeable bankruptcy attorney can provide valuable guidance and help you make informed decisions about your financial future.