Updated by Attorney Lisa Guerin
If you want to file for Chapter 7 bankruptcy, you must pass the means test. The means test looks at your income, and perhaps 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. This article explains the basics; for detailed information and help with the math, see Nolo's online means test calculator.
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.
But beware: by "current," the law refers to your average income over the six months before you file. If you've recently lost a job or another source of income, your actual monthly income on the day you file may be significantly less than what the law calls your "current" income. If you find yourself in this situation and your income exceeds the state median, it might be a good idea to wait a few months before you file for bankruptcy.
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. But don't worry: Nolo's free online means test calculator can help you get through the math. 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.
