Preparing for and Passing the Chapter 7 Means Test

The median income and means tests are used to determine whether a debtor is eligible to file a Chapter 7 bankruptcy. In the past, anyone could file a Chapter 7 bankruptcy and the bankrutpcy judge had the discretion to determine whether the debtor had sufficient income or assets to pay general unsecured creditors.

What is the Median Income Test?

The median income test requires a debtor to prove that his income is less than or equal to the median income for a household or family of the same size in his state. As defined by the Bankruptcy Code, household includes non-family members living in the home. Median income figures can be obtained from the Census Bureau. If a debtor passes the median income test, he may file a Chapter 7 bankruptcy and is not required to pass the means test.

What is the Means Test?

If a debtor does not pass the median income test, he must pass the means test to be eligible to file a Chapter 7 bankruptcy. The means test is used to determine whether a debtor’s filing of a Chapter 7 bankruptcy amounts to an abuse of the bankruptcy process. Simply put, the means test allows a debtor to subtract certain allowable expenses from his gross monthly income to arrive at a monthly payment presumed to be available for distribution to general unsecured creditors.

Under the BAPCPA, abuse is always presumed if a debtor has at least $166.67 in net monthly income or $10,000 projected over a five year period for payment to general unsecured creditors. Conversely, abuse is never presumed if a debtor has less than $100.00 in net monthly income or $6000 projected over a five year period for payment to general unsecured creditors. If a debtor falls between these two extremes, abuse is presumed only if he has projected net monthly income sufficient to pay 25% of general unsecured claims over a five year period.

If a debtor fails the means test, he must file a Chapter 13 bankruptcy. If the base has already been filed, the trustee or a creditor may file a Motion to Dismiss or the case may be converted to a Chapter 13 with the consent of the debtor.

Rebutting the Presumption of Abuse

A debtor who fails the means test may rebut the presumption of abuse by proving the existence of special circumstances which take him outside the abuse thresholds established by the BAPCPA. Special circumstances which bankruptcy courts will consider include, but are not limited to:

Cost of infant formula and diapers;
High cost of commuting;
Call to active military duty;
Illness;
Cost of security in dangerous neighborhoods; and
Reduction of income as of the petition date.

Getting Legal Help

All debtors must file a statement disclosing their currently monthly income along with the means tests calculations. Completing the means test calculations involves use of complex formulas and reference to various data tables. Therefore, it’s best to hire a qualified bankruptcy attorney who can complete these calculations as well as the bankruptcy petition and schedules for you.

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