What is the Chapter 7 Means Test?

Chapter 7 bankruptcy is known as liquidation bankruptcy because a debtor's non-exempt assets are sold by the bankruptcy trustee. The proceeds are then distributed to creditors in order to pay against debts. In many consumer cases, all of the assets are exempt and, therefore, there are no assets to liquidate. Chapter 7 is generally the quickest form of bankruptcy.

What Is the Means Test?

The bankruptcy means test determines whether a consumer debtor's income is low enough to qualify for Chapter 7 bankruptcy. It's designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Filers with higher incomes who fail the means test are unable to use Chapter 7 bankruptcy to wipe out their debts, but they can use Chapter 13 to repay a portion of their debts.

This doesn't mean that you have to have a low income to qualify for Chapter 7. You can still earn a significant monthly income and qualify for Chapter 7 if you have a lot of expenses, such as a high mortgage payment.

How Does the Means Test Work?

The means test was designed to limit the use of Chapter 7 to people who truly cannot repay their debts. The test deducts specific monthly expenses from your current monthly income to arrive at your monthly disposable income. Your current monthly income is defined as your average monthly income over the six months prior to filing for bankruptcy.

If your current monthly income is less than the median income for a household of your size in your state, you are able to file Chapter 7. For those whose household income exceeds the state median, the means test computations get more complex. An experienced bankruptcy attorney will be able to explain what additional factors are considered in the means test.

What Happens If You Don't Pass the Means Test?

If you don't pass the means test, you are limited to using another bankruptcy chapter, generally, this means Chapter 13. In Chapter 13 bankruptcy, you make monthly payments over a three to five year period in order to pay back some or all your debts. Most people prefer to file for Chapter 7 bankruptcy as there is no payment plan required but, in some cases, it's not an option. However, Chapter 13 bankruptcy is the best way to handle specific types of problems such as curing a default on a mortgage.