If you want to file for Chapter 7 bankruptcy, you must pass the means test. The means test looks at your income, and in some cases your expenses and debts, to determine whether could afford to pay back at least some of your debts. If so, you won't be allowed to use Chapter 7; instead, you will have to use Chapter 13 if you want to file for bankruptcy.
The means test was created in 2005, when the Bankruptcy Act was amended. One of the main goals Congress had in changing the rules was to prevent abuse of the bankruptcy process by debtors. By forcing higher income debtors to use Chapter 13, the means test requires them to pay back some or all of their debt in Chapter 13, rather than allowing them to discharge their debt in Chapter 7. Although Chapter 7 filers may lose any property they can't protect with an available exemption, they don't have to directly repay any debt. Unless they own valuable nonexempt property they really want to keep, most filers who have a choice opt for Chapter 7.
To take the means test, you must first compare your monthly income in the six months before you file for bankruptcy to the median income in your state. If your income is less than the median, you have passed the means test and are eligible to use Chapter 7. If your income exceeds the median, you must figure out whether you would have enough left over, after subtracting certain expenses, to repay some portion of your debt.
Step 1: Income
The first part of the means test compares your "current" monthly income to the median income in your state for a household of your size. (You can find links to each state's median, and other state-specific bankruptcy resources, by selecting your state from the list on our Bankruptcy in Your State page.) If your income is less than the median, you may use Chapter 7; if not, you must do some more calculations to figure out whether you're eligible.
(Learn more about what constitutes current monthly income for the bankruptcy means test.)
Step 2: Expenses and Required Payments
If your income exceeds the state median, the means test continues -- and gets a lot more complicated. You must figure out whether you would have enough disposable income left, after subtracting allowed expenses, to pay off at least some of your unsecured debts (credit card bills, medical debt, and so on). If your disposable income is equal to our more than a minimum amount set by law, you will not be allowed to use Chapter 7. If you want to file for bankruptcy, you'll have to use Chapter 13 instead. And, because your income exceeds the state median, you will have to use a five-year repayment plan (those whose income is less than the state median can repay debts over only three years, if they choose to use Chapter 13).
Crunching the Numbers
If your income is less than the state median, the means test is relatively straightforward. For those with higher incomes, however, the means test is quite complex. Not only will you have to do pages of calculations, but you'll have to find the correct income and expense figures for your area and household size.
Using an Online Means Test Calculator
If you're looking for an easy way to determine your eligibility under the Chapter 7 means test, visit www.legalconsumer.com and use its online bankruptcy means test calculator, created by the author of Nolo's book How to File for Chapter 7 Bankruptcy, Albin Renauer, J.D. Once you enter your zip code, the calculator uses the applicable income and expense standards for your state, county, and region to determine your eligibility.
Once you supply your zip code, the calculator uses the current applicable income and expense standards for your state, region, and family size to help determine your eligibility. You'll still have to supply your own financial information, but at least you won't have to look up all of the relevant data for your area -- or do any math.