Before you can file for Chapter 7 bankruptcy, you must pass the bankruptcy means test. The means test uses your income and expenses to determine whether you have enough disposable income to pay back a portion of your unsecured debts. If your disposable income is too high, you will not pass the means test. Read on to learn more about whether you can pass the means test if you recently got a well-paying job.
For more information on how the means test works, see our Chapter 7 Means Test topic area.
When you complete the means test, you must disclose your income from all applicable sources to arrive at a figure called current monthly income (CMI). Despite its name, CMI is actually an average of all income you received during the six calendar months preceding your bankruptcy filing.
If your CMI is less than the median income in your state for the same size household, you automatically pass the means test. If your CMI is higher than the state median, you must complete the entire means test form and use certain allowed deductions to determine whether or not you pass. This means that if you recently got a well-paying job, your average income over the last six months may still be low enough to automatically pass the means test.
Jon started a new job with a $4,000 per month salary on June 1. For the past nine months, his only income was $1,000 per month in unemployment benefits. It’s now July 10 and Jon is considering filing for Chapter 7 bankruptcy. If Jon files for bankruptcy in July, he will only have to include one month’s worth of wages from his new job when calculating his CMI on the means test. Because Jon received $1,000 per month for five of the six calendar months prior to his bankruptcy filing, his six-month average CMI is only $1,500 ($5,000 in unemployment benefits plus wages of $4,000 divided by six).
For more detailed information on how to calculate your CMI, see What Is Current Monthly Income for the Means Test?
To determine whether you need to file your case right away, use your current monthly income from your new job to see if you pass the means test. If you still pass the means test with no problems, then you may not have to file your case immediately. But if your current income is too high to pass the means test, it may be in your best interest to file your case while your CMI is still low.
While the means test is the primary factor courts consider when determining whether you qualify for Chapter 7 bankruptcy, they also take into account the totality of your circumstances (including your current income). Even though the means test looks at your average income for the last six months, you must disclose your current income on Schedule I: Your Income of your bankruptcy petition.
If your current budget shows that you have a lot of disposable income left after paying your expenses, the court can still dismiss your case under the totality of circumstances test. If your new income is significantly higher than the state median, consider talking to a knowledgeable bankruptcy attorney who can help you determine whether you should still file your case.