What if I Don’t Pass the Means Test?

The bankruptcy means test is a crucial component of the bankruptcy process. It is a formula used to determine whether an individual is eligible for Chapter 7 bankruptcy, which allows for the discharge of most debts. The means test was created as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, which aimed to prevent individuals from abusing the bankruptcy system.

the purpose of the means test

The purpose of the means test is to determine whether an individual has enough disposable income to pay back their debts. The test takes into account the individual’s income, expenses, and family size to determine their disposable income. If the individual’s disposable income is below the state median income, they are eligible for Chapter 7 bankruptcy. If it is above the median income, the individual may still be eligible for Chapter 7 bankruptcy but will need to complete additional calculations to determine their eligibility.

calculation of disposable income

Calculation of Disposable Income. The calculation of disposable income is a key component of the means test. Disposable income is the amount of income that is left over after an individual’s necessary expenses are deducted. The necessary expenses include housing, food, clothing, transportation, and other basic expenses. The means test uses standardized expense allowances for certain categories of expenses, such as housing and transportation, based on the individual’s location and family size. If an individual’s disposable income is above a certain threshold, they may not be eligible for Chapter 7 bankruptcy and may be required to file for Chapter 13 bankruptcy instead. Chapter 13 bankruptcy involves a repayment plan in which the individual pays back their debts over a period of three to five years.

Size of Your Household. The Chapter 7 bankruptcy means test compares your current monthly income against the median income for households similar in size. The means test looks at the average household income over the six months prior to filing. However, not all income is considered in the means test. Social security income, social security disability, veteran’s disability benefits, and child support payments are not considered. Conversely  income from; employment, gifts, financial assistance from others, and income from a non-filing spouse are included in the calculation.

If you household income exceeds the median income for households of a similar size in your state you still may be able to qualify for a Chapter 7.  This is because certain expenses are deducted from your current monthly income in order to determine your net monthly income. Now not all expenses are qualifying expenses, however, the following kinds of costs can be deducted: child support, alimony, tax withholding costs, health savings account, garnishments, certain utilities and several other types of expenses.

However, if you still do not qualify for a Chapter 7 even after deducting the qualified expenses you can still file bankruptcy. Most people who do not qualify for Chapter 7 bankruptcy because of their high income, are able to file Chapter 13 bankruptcy. Chapter 13 bankruptcy is a reorganization of your debts. The bankruptcy lasts for 3 to 5 years during which time you make payments to your creditors. At the end of the bankruptcy whatever balances are left over will be discharged.

If you are looking to file bankruptcy then contact the Dunaway Law Group at 480-702-1608 or message us HERE.

The Dunaway Law Group provides this information as a service to clients and other friends for educational purposes only. It should not be construed or relied on as legal advice or to create a lawyer-client relationship. Readers should not act upon this information without seeking advice from professional advisers. The Firm limits its practice to the state of Arizona and New York.

Author: Clint Dunaway

Arizona attorney.