A Chapter 7 bankruptcy allows a debtor to discharge consumer debts. At the end of the bankruptcy, your legal obligation to pay these debts disappears. Your credit record will reflect your bankruptcy, but you will never pay those discharged debts.
To ensure Chapter 7 only gets used by debtors who truly need relief, Congress passed the “means test” in 2005. Bankruptcy courts use this test to determine a debtor’s eligibility for Chapter 7 bankruptcy.
What is the means test?
The means test is a set of financial analyses to determine your eligibility for bankruptcy under Chapter 7. The means test has two parts. If you meet the eligibility requirements under either part, you have a choice to file under either Chapter 7 or 13 bankruptcy. If you fail both parts, you can only file under Chapter 13.
Part One of the Means Test
The first part of the means test looks at your income. You will document your monthly income over the past six months, excluding the month you file for bankruptcy.
Suppose that you plan to file for bankruptcy in August. You will use your monthly income from February through July.
The test uses your average monthly income over the six months preceding your filing date. By using an average, the number reflects recent increases or decreases in income. You multiply the average monthly income by 12 to determine your average annual income.
You will compare your average income to the Census Bureau median income in your state. The median income charts used by Bankruptcy Courts account for the size of your family. Using the median income chart from 2022, a couple in California with an average annual income of less than $87,355 will pass part one of the means test.
Part Two of the Means Test
If you pass the first part of the means test, you do not need to perform part two. Those who failed part one get a second chance to qualify for Chapter 7.
In part two, you calculate your disposable income. To do this, you subtract your allowable expenses from your monthly income. This part of the test eliminates people who may have high debt, but also have enough disposable income to pay those debts.
Your allowable expenses include all necessities, such as:
- Food
- Shelter
- Utilities
- Transportation
- Clothing
- Healthcare
You will fail part two if your disposable income multiplied by 60 months is greater than 25% of the unsecured debts you are trying to discharge through bankruptcy. In other words, you can only discharge your debts if you cannot pay more than 25% of them in five years.
When to File Bankruptcy So That You Pass the Means Test
About 88% of bankruptcy filers pass part one of the means test. If you do not pass parts one or two, you can adjust your timing to increase the chances you will pass. The key to passing is to have the lowest reasonable average monthly income.
More months with low or zero income will lower your average. For example, if you lost your job in March, your average in April will be higher than your average in July.
At the same time, you need to keep in mind that your bankruptcy filings must be true and accurate. If you fudge the numbers, you could face severe consequences. Also, many debtors simply cannot wait for their income average to drop before they file. They need immediate relief and cannot wait until they pass the means test.
As a result, when you fail the means test, you should consult a lawyer about the feasibility of waiting to file and your options if you do not wait.
Find Out More About the Requirements to File Chapter 7
Chapter 7 bankruptcy provides powerful relief when your finances have hit a rough patch. But Chapter 7 is not available or advisable for everyone. To learn about your bankruptcy filing options, contact Heritage Legal, a bankruptcy law firm located in Palm Springs, CA.