Chapter 7 Means Test

What Is The Chapter 7 Means Test?

In the context of a Chapter 7 Bankruptcy, the "Means Test" is a test used by the courts to determine if a debtor qualifies or is eligible to file for Chapter 7 Bankruptcy.

With the bankruptcy law changes that came in effect on October 17, 2005, the Chapter 7 Means Test requirements can cause a lot of confusion.

In Chapter 7 Bankruptcy, unsecured debts are generally discharged in full and the debtor gets a fresh start. Chapter 13 Bankruptcy is different, since the debtor is sometimes required to pay back a percentage of their debt over a 3-5 year period.

Before the advent of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, the main reason for someone to file under Chapter 13 Bankruptcy was to avoid the loss of a home, loss of a car or the loss of personal property. And while this protection of property remains to be a big reason for someone to elect Chapter 13 Bankruptcy over Chapter 7 Bankruptcy, the new standards may force some people to file Chapter 13 even if they do NOT have any real property. The reason for this being that the means test will take into account the debtor's income level.

To use the means test, the courts look at the average income of the debtor/debtors for the 6 months prior to the filing, and compare it to the state's median income (which is dependent upon household size). For example, say the median annual income for a single wage earner in Texas is $40,000. If income is below the median, then Chapter 7 remains an option, based on the person's budget. If the income is greater than the median, the remainder of the means test will be applied.

The next step in the means test takes income minus any living expenses (allowed by the IRS standards) (excluding payments on the debts that are included in the bankruptcy), and multiplies that by 60.

If the income for debt repayment for that 5-year period is $10,000 or more, then Chapter 13 is probably required.

To summarize, first find out whether you are above or below the median income for your state - median income figures can be found at http://www.new-bankruptcy-law-info.com. Be sure to account spouse income as well if applicable. Second, deduct your average monthly living expenses (per the IRS standards) away from your monthly income and then multiply it by 60. If the result is above $10,000, you may be forced to go with Chapter 13. If the result is less than $6,000, you may be eligible to file Chapter 7. If the result is between $6,000 and $10,000, compare it to 25% of your total debt. If above 25%, you may be forced by the court into a Chapter 13.

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