The Bankruptcy Means Test

For bankruptcy purposes, the means test is a calculation that determines whether you qualify for a Chapter 7, a 3 year Chapter 13 Plan, or a 5 year Chapter 13 Plan.  The test is designed to take your income and measure it against your actual expenses as well as the average person’s income and expenses.  The test is used to determine whether or not you have excess income available to pay your debts.  In short, if it is found that you don’t have excess income, then you will qualify for a Chapter 7.  If you do, then you still have the option to file a Chapter 13.

How to Calculate the Means Test

In order to calculate the means test, we first have to look at your gross monthly income.  This is all the income you collected over the past six months before any taxes, deductions, insurance, etc.  Then you subtract some types of income, such as social security wages.  If the number is less than the Census Bureau’s average income for your household size in your area, then you will qualify for a Chapter 7. However, if you need to file a Chapter 13, then you will qualify for a 3 year payment plan.

If this number is not less than the average income, then you have further deductions to try to qualify for a Chapter 7.

First, you deduct the amount of taxes you are supposed to pay on that income.  Other actual deductions include your secured debt payments, such as mortgage or car payments.

After deducting secured payments, you will deduct national living standards of food, clothing, household supplies, etc.  These deductions are taken from the IRS.   If you rent, then you will deduct the IRS housing allowance and utilities.

There are other deductions from your actual necessary expenses that you can deduct including child support, involuntary retirement plans, and health insurance.

After all of the deductions, if you nearly break even or are in the negative at the end of the month then you qualify for a Chapter 7.  If you do not, then you might still have the option to file a Chapter 13.

What are My Options if I Don’t Pass the Means Test

As stated above, you have the option to file a Chapter 13.  Also, the numbers provided by the IRS and Census Bureau are pretty accurate.   In most cases, you should be able to cut expenses in most areas.  This will help you pay back your debt.  Make sure you consult a bankruptcy attorney to help you with the calculations.  The means test is complex.  More importantly, an attorney will be familiar with the accepted deductions in your area.  Some courts might allow a higher deduction for a certain expense.  An attorney will be able to properly complete the means test for you and better explain your options when it comes to filing bankruptcy.