If you’re overwhelmed by debt, filing for Chapter 7 bankruptcy holds the promise of a fresh financial start: Though you may need to liquidate some non-exempt assets to pay creditors, the action also allows you to discharge most of your debt. However, not everyone qualifies for Chapter 7 relief. The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 introduced a means test designed to determine whether debtors are eligible to file under Chapter 7 or if they instead must file under Chapter 13 bankruptcy, which mandates agreeing to a repayment plan rather than a discharge.

The means test’s goal is to ensure that only those who truly can’t repay their debts can file to have their debts discharged. It does this by assessing a debtor’s income and expenses to calculate how much disposable income they actually have. If that number is too high, they may be steered toward Chapter 13 instead. The test has two parts:

• Comparing Income to the State Median – The means test first compares your household income to the median income for a same-sized household in your state, which is determined by the U.S. Census Bureau. If your test shows that your income is below the median, you automatically qualify for Chapter 7 and do not need to proceed to the second step.
• Assessing Disposable Income – If your income exceeds the state median, you then go on to complete a more detailed analysis of your income and allowable expenses, including housing, food, medical costs, and transportation. These are deducted from your income calculation to determine your disposable income. The Internal Revenue Service (IRS) has issued guidelines for many categories, but some actual expenses may be considered.

If, after deducting these expenses, you have little to no disposable income, you can still qualify for Chapter 7. If you have enough disposable income to repay a portion of your unsecured debts, you may be instructed to file for Chapter 13 and have a structured repayment plan created.

If you are a disabled veteran or your debts are primarily business-related, you may be exempt from the means test. This is also true if your financial situation changed suddenly because of a job loss, unexpected medical expenses, or a similar scenario. If you can present evidence of your inability to repay your debts, you may still be able to pursue a Chapter 7 filing.

The means test is an essential part of determining your eligibility for Chapter 7 bankruptcy. If you need more information or guidance, contact our experienced bankruptcy attorneys today.