Consumers generally have two kinds of bankruptcy available to them: Chapter 7 and Chapter 13. Chapter 7, or “straight” bankruptcy, is generally the preferred option because, unlike Chapter 13, it is faster and doesn’t require the consumer to repay any portion of their dischargeable debts.
However, to be eligible for Chapter 7 you must pass the means test.
What Is Required to Pass the Means Test for Chapter 7?
In order to qualify for Chapter 7, you must pass an income limitation assessment known as the “means” test to ensure you are a low-income filer who does not have the means to pay back creditors.
This is how the means test works:
- Calculate your current monthly income
- Compare this with your state's median income based on your household
- If your monthly income exceeds your state’s median income based on your household size over the last six months prior to filing, you won’t qualify for Chapter 7.
What Type of Income Is Counted in the Means Test?
But not all income is treated alike under bankruptcy rules. Here’s what counts — and what doesn’t:
- Countable income includes: Wages, child support, alimony payments, rental income, bonuses, gifts from relatives, self-employment, and other sources of regular money.
- Non-countable income includes: Social Security Disability (SSD), Supplemental Security Income (SSI), and benefits or compensation paid to disabled veterans, reservists, and national guard members. Some portions of a personal injury award, if one was received during the six-month period in question, may also be excluded from the means test.
Can I Still Qualify for Chapter 7 If My Income Is Above The State's Median?
If your countable income doesn’t fall below the median for your state, you may still qualify for Chapter 7 by subtracting your allowable expenses.
Certain expenses can be deducted from your income, such as:
- Mortgage or rent
- Utility bills
- Medical and prescription costs
- Transportation expense
Deducting these everyday expenses may be enough to leave you with little or no disposable income to repay your debts. This is particularly helpful when someone has a significant income and big bills to match, or when someone in your family has unusual medical needs.
What Are My Options If I Don't Pass the Means Test?
If your income is too high to pass the means test currently, you have several options:
- Review your means test calculations for errors: Mistakes can be common when calculating your means test figures. Review your figures again to make sure your income is correct, that you applied all your qualifying deductions, and used the correct household size.
- File for Chapter 13: If your income is too high for Chapter 7, you will qualify for Chapter 13, which requires that you repay a portion of your debts between a 3-5 year period.
- Wait until you are eligible for Chapter 7: If you anticipate that your average income will decrease, such as a pay cut, job loss, or other loss in income, you may benefit from waiting a few extra months before filing for Chapter 7.
Consult an attorney to discuss your situation and the right path to take for your debts.
Interested in Chapter 7 Bankruptcy?
If you’re hesitant to file for bankruptcy because you’re not sure about your ability to qualify for relief through Chapter 7, we're here to help you. Make an appointment with an experienced advocate and learn more about your options.