Do You Pass The Bankruptcy Means Test?

Steps of the Bankruptcy Means Test

1. Calculation of Current Monthly Income (CMI)
   • Income Assessment: Calculate your average monthly income over the six months prior to filing for bankruptcy. This includes all sources of income, such as wages, salary, bonuses, rental income, and other forms of income.
   • Exclusions: Social Security benefits and certain other specific income sources may be excluded from this calculation.
2. Comparison to Median Income
   • Median Income: Compare your calculated average monthly income to the median income for a household of your size in your state. Median income levels are periodically updated and can be found on the U.S. Trustee Program website.
   • Qualification: If your income is below the state median, you automatically qualify for Chapter 7 bankruptcy and do not need to proceed to the next step.
3. Disposable Income Calculation
   • Allowed Expenses: If your income is above the median, you must calculate your disposable income by subtracting allowable expenses from your current monthly income. These expenses include:
     • Living Expenses: Costs for food, clothing, housing, utilities, transportation, and medical expenses. These are based on national and local standards issued by the IRS.
     • Secured Debts: Payments for secured debts, such as mortgage or car loan payments.
     • Other Necessary Expenses: Other allowable expenses include taxes, insurance, child care, and support obligations.
4. Determination of Eligibility
   • Disposable Income Threshold: If your disposable income after allowable expenses is low enough, you may qualify for Chapter 7 bankruptcy.
   • Failing the Means Test: If your disposable income is above a certain threshold, you may not qualify for Chapter 7 and will likely need to file for Chapter 13 bankruptcy, which involves a repayment plan.

Significance and Impact

• Preventing Abuse: The means test ensures that individuals who have the ability to repay a portion of their debts do so under a Chapter 13 repayment plan, rather than discharging all debts under Chapter 7.
• Structured Repayment: For those who do not qualify for Chapter 7, Chapter 13 provides a structured environment to repay debts over three to five years, which can offer a path to financial recovery without losing significant assets.

Resources for More Information

• United States Courts – Bankruptcy Means Test
• Nolo – The Bankruptcy Means Test
• Justia – Means Test for Chapter 7

These resources provide further details and calculators to help understand if you meet the requirements for Chapter 7 or Chapter 13 bankruptcy based on the means test.