BANKRUPTCY: Means Test – Chapter 7

The means test under Bankruptcy Chapter 7 determines whether people are even eligible to file bankruptcy under Chapter 7. Failing the test requires filing a chapter 13, filing no bankruptcy or taking a closer look.

First Step To Chapter 7 Means Test

The first step is simple math. Add all gross income in the household during the six calendar months before the date of filing. For example if you file in January, every penny of income from July 1 until December 31. Divide by six. This is your current monthly income or “CMI”. If you are below median family income numbers established by the U.S. Census Bureau for your state, then you qualify. It’s that simple. You qualify for chapter 7 bankruptcy. Those who fail move to a second step.

Second Step: Chapter 7 Means Test Mechanics

Above-median debtors face a second phase of testing. Here, deductions are taken from CMI. Bankruptcy law borrows some of the deductions from IRS allowances, other deductions are actual expenses. The allowable expenses are subtracted from income to determine “disposable income.”

The idea is that where household income is over the state median, there may be adequate income left over after paying all bills, or more accurately, allowable monthly expenses, to pay at least a percentage of the unsecured debts like credit cards.

In the final analysis, any disposable income is tested against the amount of debt that could be paid over a five year span. If the number is high enough, the person taking the test is kicked out of chapter 7, and must consider either a chapter 13 payment plan, or no bankruptcy filing.

Final Number Crunching

The Chapter 7 means test is spelled out on a form called the B22A. The form links the user to IRS pages with the applicable income and expense standards for the state, county, and region of the filer in order to determine eligibility to file Chapter 7.

Under the bankruptcy law, those who fail the means test can only file a chapter 7 bankruptcy if special circumstances are demonstrated. Special circumstances are defined in the U.S. Bankruptcy code under section 707(b)(2)(B). Some think the idea of special circumstances provides a relief valve from harsh means test results. But, in reality, some courts have said special circumstances only exist in ‘dire circumstances’.

So, the test starts out as relatively simple math: and those whose income falls below the Census Bureau’s median family income qualify. After that, the means test presents more of a challenge.

This article summarizes the Chapter 7 means test. The test differs under Chapter 13, as outlined on bankruptcy Form B22C.

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