Chapter 7 Bankruptcy Means Test

One of the first concerns that you may have when considering bankruptcy is whether you qualify to file bankruptcy and if so, do you qualify for a Chapter 7 bankruptcy. Amendments to the bankruptcy laws in 2005 changed how people can qualify for Chapter 7 bankruptcy. Changes in the bankruptcy code now require that you pass a means test analysis to be able to file for Chapter 7 bankruptcy.

How Does the Means Test Work?

The means test analysis looks at your last 6 months of income to determine whether you qualify for Chapter 7 bankruptcy. As part of the means test you are required to enter the last 6 months of income from all sources. The means test uses the last 6 months of income to calculate what your gross yearly income would be. For example if my income has been exactly $5,000 each month for the last 6 months the means test analysis would calculate that my income is $60,000 for the year. Unfortunately, since the means test is a mechanical test it does not take into consideration many factors that would make this calculation inaccurate. For example I may have been making $5,000 a month, but I have just been laid off. The means test would still state that I make $60,000 a year, since it is based on the last 6 months of income.

Once your yearly income is calculated based on the last 6 months of income then it is compared against the Median Household Income for your Household Size. If your yearly gross income is below the Median Family Income for your family size then you do not have to complete the full means test. If your income is below the Median Income then there is no presumption of abuse for filing for bankruptcy. Each state has a median household income level. You can find you states median income by going to: http://www.justice.gov/ust/eo/bapcpa/20100315/bci_data/median_income_table.htm

If you are above the median income level for your family size then you will have to complete the full means test analysis. The full means test analysis takes standard deductions for items such as food, clothing, utilities, and deducts also for vehicle payments, mortgage payments, income taxes, childcare, health care expenses. After completing the deductions if you have available disposable income of $118, then you will not pass the means test. When you are not able to pass the means test then there is a presumption of abuse. If you have below this amount of disposable income then you will pass the means test analysis and there will not be a presumption of abuse.

If I Don't Pass the Means Test Does that Mean I Can't File for Chapter 7 Bankruptcy?

If you do not pass the means test analysis then you may have to examine whether there are special circumstances that may warrant you still filing for Chapter 7 bankruptcy. There is a deduction that you can take on the means test based on special circumstances. You should consult with an experienced bankruptcy attorney if you feel you have a special deduction that may qualify under this category.

In addition if your debt is mainly non-consumer debt (debt from business) then you do not have to complete the means test to qualify for Chapter 7 bankruptcy or if you are a disabled veteran that incurred the debt while on active duty or performing a homeland defense activity.

If I Pass the Means Test Does That Mean I Can File For Chapter 7 Bankruptcy?

Even though you passed the means test or did not have to complete the full means test analysis, this does not mean that you qualify and should file for Chapter 7 bankruptcy. There may be other circumstances that indicate that you may not qualify or a reason why you should not file for Chapter 7 bankruptcy. For example:

Lets assume that I am a single person and that based on my last 6 months of income I will be making approximately $36,000 a year. Lets also assume that I live in California where the median income for a household of 1 is $48,140. I am below the median income and therefore pass the means test analysis. Although this is the case, I am also living at home and have minimal expenses. After covering my necessary expenses such as food, clothing, cell phone, and car expenses, I am left monthly with approximately $300 a month extra. It is generally presumed that if you are left with less than $100 to pay creditors with after covering your necessary expenses then you can file for Chapter 7 bankruptcy. Even if you pass the means test you still need to examine whether you have additional income after covering necessary expenses to pay creditors with. Also keep in mind that your necessary expenses have to be within reason.

There are also circumstances where assets that you have may not be protected in a Chapter 7 bankruptcy and it may be a better option to try to file for Chapter 13 bankruptcy. When you file for bankruptcy in your state there are specific bankruptcy exemptions that apply that tell you which assets you can protect in a bankruptcy. Even though you may qualify for Chapter 7 bankruptcy you also have to take into consideration whether any assets will be liquidated as part of the bankruptcy.

There are numerous other factors that may affect whether you qualify for Chapter 7 bankruptcy. It is always important to consult with an experienced attorney who can generally advise you on whether Chapter 7 bankruptcy is an option for you.

From Southern California Law Advocates: Riverside Bankruptcy Attorney