Bankruptcy Means Test

Courts use the bankruptcy “means test” to determine if a debtor qualifies to file for a Chapter 7 Bankruptcy. If a debtor does not pass the means test, he or she will not be eligible to file under Chapter 7. When Chapter 7 bankruptcy is not an option, the only option left is Chapter 13 bankruptcy, under which debtors must create plans to repay as much of their debts as they can afford.

Chapter 7 bankruptcy was created to give individuals with lower incomes a way to file bankruptcy without having to wipe themselves out financially. Someone who earns a high or regular wage can sometimes afford to pay back debts while a person living on limited means or a fixed income usually cannot afford to do so. Chapter 7 legally wipes out a person’s qualifying debts altogether by liquidating the debtor’s property through sale by a court-appointed trustee. The trustee may sell property that is not exempt under state law.

How Do Courts Use the Bankruptcy Means Test?

The first thing that the court will determine is whether or not the debtor’s current income is less than the median income of a family of the same size in your state. If the individual resides in Illinois, the bankruptcy court compare his or her income with household incomes from across Illinois and not from any other state. The court will look at average income from the past six months before the individual filed for bankruptcy.

If the individual’s income is less than the median, that person passes the bankruptcy means test and can file for Chapter 7. No other proof is needed. If the person’s income is above the median, he or she may still qualify for Chapter 7, but only after following some additional steps.

Additional Steps

If someone failed the first portion of the means test, that person must show the court that after paying for necessities such as food, shelter, transportation, clothing, and utilities, the household does not have enough disposable income left over to pay at least part of its debts. Too much disposable income left over results in failing the means test and filing for Chapter 13 bankruptcy.

Some people have large regular expenses that can help them qualify under the means test. These expenses might include:

  • Care for a chronically ill, disabled, or elderly family member.
  • Health care costs above insurance costs.
  • Court-ordered payments including alimony and child support.

Passing the means test is a way for a debtor with a lower income to qualify for Chapter 7, which can help them recover financially from debt. Some people prefer filing Chapter 7 since they are not required to make regular payments and follow a strict budget for three to five years. Others prefer Chapter 13 if they are determined to keep certain assets such as a home. While online calculators may be able to give a rough estimate as to whether someone would pass the means test, it may be a good idea to meet with an experienced bankruptcy attorney to determine which kind of bankruptcy is the preferable way to achieve their goals.