Chapter 7 Bankruptcy Laws Regarding Your Income

The Chapter 7 bankruptcy laws require debtors to meet certain eligibility requirements.  To qualify for Chapter 7 relief, a debtor must satisfy either the median income or means tests. 

What is the Median Income Test?

The median income test requires a debtor to demonstrate that his household income is less than or equal to the median income for a family/household of the same size in his state.  The Bankruptcy Code includes in the definition of household anyone living in the home, including non-family members.  If a debtor satisfies the median income test, he qualifies for Chapter 7 debt relief and is not required to pass the means test. 

What is the Means Test?

The means test is the method established by the Bankruptcy Code for determining whether the filing of a Chapter 7 case amounts to an abuse of the bankruptcy process by a debtor.  All Chapter 7 debtors must complete the Statement of Monthly Income and Means Test (Official Form 22A).  The means test allows for the deduction of certain allowable expenses from the debtor’s current monthly income to arrive at a monthly amount presumed to be available for payment to the debtor’s general unsecured creditors. 

There is a presumption of abuse if the debtor has available for payment to general unsecured creditors at least $166.67 per month or $10,000 projected over a five year period.  On the other hand, there is never a presumption of abuse if the debtor has less than $100 in net monthly income or $6000 projected over five years for payment to unsecured creditors.  If the debtor falls between these two extremes, abuse will be found only if the debtor has sufficient net monthly income to pay at least 25% of general unsecured claims over a five year period. 

If a debtor fails the means test, he must file a Chapter 13 case.  If he has already filed a Chapter 7, he may convert to a Chapter 13 or dismiss the Chapter 7 case. 

Exceptions to the Median Income and Means Tests

Non-consumer debts are not subject to the median income or means tests.  Therefore, if the majority of a debtor’s debts are taxes, business debts, arise from the commission of a tort, or are other non-consumer debts, the debtor is not required to pass either the median income or means test.  Additionally, disabled veterans are not required to pass the means test. 

Getting Legal Help

The means test requires the completion of a series of rather complex calculations which are often very confusing to a layperson.  To ensure that Official Form 22A and the remainder of the bankruptcy petition and schedules are completed accurately, you should hire a qualified bankruptcy attorney.