How the Bankruptcy Means Test Works—and Why It Matters

Filing for bankruptcy can be a daunting process, but it often provides much-needed relief for individuals struggling with overwhelming debt. One of the critical steps in determining whether you qualify for Chapter 7 bankruptcy is the Bankruptcy Means Test. This test ensures that Chapter 7 bankruptcy, which eliminates most unsecured debts, is reserved for those who truly need it. In this article, we’ll break down how the Means Test works, why it matters, and how

 can help you navigate this process successfully.

What is the Bankruptcy Means Test?

The Bankruptcy Means Test is a formula designed to evaluate your financial situation and determine if you have enough disposable income to repay some of your debts under Chapter 13 instead of filing for Chapter 7. The Means Test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 to prevent abuse of the bankruptcy system.

The test compares your income to the median income for a household of your size in your state. If your income falls below the median, you automatically pass the test and can file for Chapter 7 bankruptcy. If your income is above the median, additional calculations are required to determine your disposable income and whether you qualify.

How the Means Test Works Step-by-Step

1. Calculate Your Current Monthly Income

The first step of the Means Test involves calculating your “current monthly income.” This is your average income over the six months prior to filing for bankruptcy. All sources of income are included, such as:

• Wages or salary

• Self-employment income

• Bonuses and commissions

• Rental income

• Unemployment benefits

• Pension or retirement income

However, Social Security benefits are excluded from this calculation.

2. Compare Your Income to Your State’s Median

Once your monthly income is calculated, it is compared to the median income for households of the same size in your state. The U.S. Census Bureau regularly updates these figures, and they vary depending on where you live. For instance, the median income in one state may be significantly higher than in another.

If your income is below the median, you pass the Means Test and can proceed with Chapter 7 bankruptcy. If your income exceeds the median, you must move to the next step.

3. Deduct Allowed Expenses

If your income is above the state median, the Means Test allows you to deduct specific expenses to determine your disposable income. These expenses include:

• Housing costs (rent/mortgage, utilities)

• Food and clothing

• Transportation (gas, car payments, insurance)

• Medical expenses

• Taxes and other mandatory payroll deductions

The IRS sets standard amounts for some of these expenses, so you may not be able to claim your exact costs. After deducting these expenses, the remaining income (your “disposable income”) is used to determine your eligibility for Chapter 7 bankruptcy.

4. Determine Your Disposable Income

If your disposable income is low enough, you pass the Means Test and qualify for Chapter 7 bankruptcy. If your disposable income is too high, you may be required to file for Chapter 13 bankruptcy instead, where you’ll enter into a repayment plan to pay off some or all of your debts over 3-5 years.

Why the Means Test Matters

The Means Test plays a critical role in the bankruptcy process because it determines whether you can eliminate your debts under Chapter 7 or if you must repay a portion of them under Chapter 13. For individuals with limited income and few assets, passing the Means Test and filing for Chapter 7 can provide a fresh financial start.

Failing the Means Test doesn’t mean you’re out of options. Chapter 13 bankruptcy can still offer significant benefits, including stopping foreclosure, reorganizing debts, and protecting your assets. Bankruptcies lawyers near me can assess your financial situation and help determine the best course of action.

How Bankruptcy Lawyers Can Help with the Means Test

The Means Test is complex, and even a small error in calculations or paperwork can lead to a dismissal of your bankruptcy case. This is where experienced bankruptcies lawyers near me come in. A bankruptcy attorney can:

• Accurately calculate your income and expenses

• Ensure all allowable deductions are included

• Help you understand your options if you don’t pass the Means Test

• File all paperwork correctly and on time

• Represent you in court if needed

By working with a knowledgeable bankruptcy lawyer, you can avoid common pitfalls and increase your chances of successfully filing for bankruptcy.

Conclusion

The Bankruptcy Means Test is a key step in determining eligibility for Chapter 7 bankruptcy. While it may seem intimidating, understanding how it works can make the process much smoother. If you’re struggling with debt, consulting bankruptcies lawyers near me can provide the guidance and support you need to regain control of your financial future. Whether you qualify for Chapter 7 or Chapter 13 bankruptcy, a trusted attorney will help you navigate the process and achieve the fresh start you deserve.