Chapter 7 bankruptcy offers many people a way to wipe the slate clean and rebuild financially. But, not everyone is eligible to file for Chapter 7 bankruptcy. One key determining factor is the “means test,” added to the U.S. Bankruptcy Code in 2005. The means test was created to address creditor concerns that people who didn’t really need to file for bankruptcy were using the process to walk away from their debts.
What is the Chapter 7 Means Test?
The means test is a multi-step process designed to determine whether an individual or couple truly can’t afford to pay their debts. The first step is simple: compare your household income with the median income for a household of your size in your state. You can find the median income information on the Department of Justice website. But, the median income figures are updated regularly, so make sure you are looking at the most recent data.
Your income for purposes of the means test is the average of your monthly income across the previous six months. However, be sure to read the Statement of Income form carefully or consult a local bankruptcy attorney about the types of income that should be included. Some income, such as Social Security benefits, governmental disability benefits, and compensation paid to survivors due to the death of a military family member, are excluded from the income calculation. So, a person whose only income is from Social Security retirement benefits or VA disability benefits won’t have any income to list.
If your counted income is below the median for a household of your size in your state, there is no presumption of abuse and you can skip the rest of the means test and proceed with your Chapter 7 filing. If your income is above the median, that doesn’t mean you’re automatically disqualified. Instead, you move on to the next step.
Exemption from Presumption of Abuse
Prospective Chapter 7 filers whose income exceeds the median typically move on to a calculation involving debts and income. However, there are a few exceptions. A bankruptcy petitioner who is exempt from the presumption of abuse needs only submit a separate form that identifies the applicable exemption.
The exemption applies if the petitioner:
- Does not primarily have consumer debts (personal, family, and household debts. In other words, if most of a consumer’s debts are business-related, they are not subject to the means test.
- Is a disabled veteran who incurred debts mostly while on active duty or performing a homeland defense activity.
- Is or has been a Reservist or member of the National Guard and meets certain other requirements.
The Means Test Calculation
If your income is above the median and you don’t qualify for one of the exemptions listed above, the next step is to compare your monthly income with your monthly expenses to determine how much you have left over each month. Note, though, that not all expenses are considered, and the amount allowed for a particular expense may not be the same as the actual amount you spend. Some figures come from national IRS standards, and others local standards. Others are actual expenses.
When you’ve determined the difference between your income and allowable expenses, you’ll multiply the leftover amount by 60 to determine how much disposable income you’ll have over the next five years. If that number is less than $9.075, there is no presumption of abuse and you may proceed with the filing. This amount and all other amounts listed in this section will be updated on April 1, 2025, and every three years thereafter.
If your disposable income across five years is $15,150 or more, a presumption of abuse arises, and you probably cannot file Chapter 7 bankruptcy. However, if you have special circumstances that could overcome the presumption of abuse, you can explain those circumstances and the court may decide that you have overcome the presumption and may proceed with your case. The U.S. Bankruptcy Code lists just two examples of special circumstances: a serious medical condition and being called up for active duty with the military. Other circumstances may qualify, but these are determined on a case-by-case basis by the bankruptcy judge. If you believe you have special circumstances, it is especially important to work with an experienced bankruptcy attorney to describe and document those circumstances.
The Disposable Income Gap
You’ve undoubtedly noticed that there’s a significant gap between the cut-off for “no presumption of abuse” and “presumption of abuse. If you fall into the gray area with disposable earnings of more than $9,075 but less than $15,150, there’s another step.
Up to this point, the means test has focused entirely on income, but if your disposable income falls in the gap, it’s time to compare that disposable income to debts. For this calculation, only non-priority unsecured debts count. Your bankruptcy attorney can explain exactly which debts do and don’t fall into this category, but some common examples of non-priority unsecured debts include credit card debt, past-due rent, utility bills, medical bills, and payday loans and other unsecured loans.
You’ll compare the total amount of non-priority unsecured debt to your disposable income over five years. If your disposable income is 25% or more of the total debt in this category, the presumption of abuse arises (though you can still claim special circumstances). If your disposable income is not enough to cover at least 25% of non-priority unsecured debt, there is no presumption of abuse and you may proceed.
This means that individuals with the same amount of disposable income may see different results. For example, a prospective bankruptcy filer with $100,000 in non-priority, unsecured debts and $10,000 in disposable income across five years won’t trigger a presumption of abuse, because the disposable income would cover just 10% of the debt. They will be eligible for Chapter 7 unless other factors disqualify them. But, someone with $30,000 in non-priority unsecured debt and the same $10,000 in disposable income will trigger the presumption of abuse because they have enough disposable income to cover 33% of their unsecured non-priority debts. They won’t be able to file under Chapter 7 unless it’s warranted by special circumstances.
Other Qualifications for Chapter 7 Bankruptcy
When most people ask whether they’re eligible for Chapter 7 bankruptcy, they’re talking about the financial aspect determined by the means test. But, it’s important to keep in mind that there are some other restrictions on filing for Chapter 7. One is that if you have received a discharge in a prior Chapter 7 case, there is an eight-year waiting period to file again. If the prior discharge was in a Chapter 13 case, the waiting period to file Chapter 7 is six years.
You may also be barred from filing Chapter 7 if you’ve had a bankruptcy case dismissed in the previous 180 days for fraud, abuse, violation of a court order or because you moved to dismiss your case after a creditor filed a motion for relief from the automatic stay.
An Experienced Chapter 7 Bankruptcy Lawyer is Your Best Resource
Many factors impact your eligibility for Chapter 7 bankruptcy, and overlooking expenses or miscalculating can cost you your case. An experienced bankruptcy attorney can help ensure that you are claiming every allowable expense. If you have special circumstances, your bankruptcy lawyer can help you articulate and document those circumstances in the most effective way possible.
To learn more about how we can help, contact us online. Or, call 303-933-4529 (Colorado) or 307-316-5660 (Wyoming) right now.