Lesson 15: Means Test for Chapter 7

As we dive deeper into the topic of Eligibility for Filing Bankruptcy, understanding the Means Test for Chapter 7 is essential. This test determines whether an individual qualifies for Chapter 7 bankruptcy, which involves liquidation of assets to pay off creditors.

For an engaging read on bankruptcy law, consider The New Bankruptcy: Will It Work for You?

What is the Means Test?

The Means Test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Its primary purpose is to prevent individuals with higher incomes from filing for Chapter 7 bankruptcy and to push them towards Chapter 13, where they would have to repay a portion of their debts.

How Does the Means Test Work?

The Means Test involves a two-step calculation:

Step 1: Median Income Comparison
The first step is to compare your household income to the median income for a household of your size in your state. You can find the latest median income figures here.
Step 2: Disposable Income Calculation
If your income exceeds the median, the next step is to calculate your disposable income by subtracting allowable expenses from your monthly income. These expenses are standardized by the IRS.

Median Income Comparison

If your household income is below the median income for your state, you are eligible to file for Chapter 7 bankruptcy. If your income is above the median, you need to proceed to the next step.

Disposable Income Calculation

For the disposable income calculation, the following formula is used:

Disposable Income = Monthly Income - Allowable Expenses

If your disposable income is too high, you may be required to file for Chapter 13 instead of Chapter 7.

Flowchart of the Means Test

The flowchart below illustrates the decision-making process of the Means Test:

graph TD A["Begin Means Test"] --> B["Is Income Below Median?"] B -->|Yes| C["Eligible for Chapter 7"] B -->|No| D["Calculate Disposable Income"] D --> E["Is Disposable Income Below Threshold?"] E -->|Yes| F["Eligible for Chapter 7"] E -->|No| G["Must File Chapter 13"]

Practical Insights

Here are some practical tips for navigating the Means Test:

Ensure all income sources are reported accurately.
Document all allowable expenses thoroughly.
Consult a bankruptcy attorney to understand specific allowances and thresholds.

Note: Failing the Means Test does not necessarily mean you can't file for bankruptcy; it just means you may need to consider Chapter 13 instead.

Conclusion

The Means Test is a critical component in determining eligibility for Chapter 7 bankruptcy. Understanding and properly navigating this test can help ensure a smoother bankruptcy filing process. For further information, you may want to explore our lesson on Chapter 7: Liquidation.