Bankruptcy Means Test
Bankruptcy means test summary:
A bankruptcy means test is used to decide whether a debtor is eligible to file Chapter 7 bankruptcy.
If you don’t meet the requirements for Chapter 7, you may still be able to file for Chapter 13 bankruptcy.
Your annual income must be less than or equal to the median family income for your state and household size to pass the means test.
Bankruptcy means test definition and meaning
A bankruptcy means test shows whether someone is eligible to file for Chapter 7 bankruptcy protection based on their income, expenses, and household size. The goal is to measure a debtor's true ability to repay their debts and prevent people from unfairly taking advantage of the bankruptcy system.
Debtors who fail the means test are ineligible to file Chapter 7 bankruptcy but could still file a Chapter 13 petition instead. A bankruptcy attorney can help with the required forms to complete the means test.
More about bankruptcy means test
The bankruptcy means test determines a person’s eligibility for Chapter 7 bankruptcy, based on their income, expenses, and household size. Debtors pass the means test if they can show that they lack enough income to pay their debts. Those who don't pass the means test may file a Chapter 13 bankruptcy petition instead.
It’s a good idea to go consult a qualified bankruptcy attorney. Anyone can represent themselves in bankruptcy, but your chances of success are better with an attorney. About 40% of people who file their own Chapter 7 case have their cases dismissed with no reduction in debt. Chapter 13 is even more complex, and virtually all filers are represented by an attorney.
Key features of the bankruptcy means test
The bankruptcy means test is a two-part screening test that tells whether you qualify for Chapter 7 bankruptcy protection. If you pass the first part, you don't need to complete the second.
Calculate monthly income
To start, you or your attorney will calculate your current monthly income on Form 122A-1. Here, you'll record your average monthly income for the six months before you filed for bankruptcy. Income includes:
Gross wages, salaries, tips, bonuses, overtime, and commissions
Alimony and maintenance payments
Child support
Net operating income from a business
Rental property income
Interest, dividends, and royalties
Unemployment benefits
Pension or retirement income
If you plan to file Chapter 7 with your spouse, you'll need to calculate their monthly average income too.
Calculate annual income and compare to the median
Once you have your total income number, you'll multiply it by 12. This is your annual income for the year. Next, look up the median income for your family size in the state where you live. Updated numbers are available on the Department of Justice website.
If your annual income is less than or equal to the median family income for your state and household size, you pass the means test.
If your annual income is more than the median family income for your state and household size, you'll need to complete Form 122A-2.
Form 122A-2 collects information about your household expenses to determine your disposable income. Disposable income, for bankruptcy purposes, is what you have left after you subtract all allowed deductions.
If your disposable income is below the threshold amount listed on the form, you might qualify for Chapter 7. You may still qualify for Chapter 7 with more disposable income, but the court will only consider it if there are special circumstances.
If you fail the bankruptcy means test
If you don't pass the means test because you have too much income, you could file for Chapter 13 bankruptcy instead. In a Chapter 13 bankruptcy, you create a structured plan to repay your debts over three or five years.
You're not required to file Chapter 13 if you don't pass the bankruptcy means test. You could pursue other options to deal with your debt instead.
Debt consolidation. Debt consolidation combines multiple debts into one so you have fewer monthly payments to manage. You could use a home equity loan or personal loan to consolidate debts.
Debt resolution. Debt resolution is negotiating agreements with creditors to clear your debt for less than the full amount owed. You could resolve debt yourself or work with a professional debt resolution company.
Bankruptcy Means Test FAQs
Does bankruptcy wipe out all debts?
Bankruptcy doesn't wipe out all types of debt. For example, in a Chapter 13 bankruptcy, you're expected to repay what you owe through a structured payment plan. Student loans and back taxes are very difficult to discharge through bankruptcy. The same goes for fines and criminal restitution, alimony, and child obligations.
Secured debts, which are guaranteed by something of value, are a special case in bankruptcy. While you could discharge them, you'll also have to give up whatever secures the debts. If you don't want to part with your assets or you have debts that can't be eliminated through bankruptcy, you may need to consider a different method to deal with them.
For example, if you owe back taxes, you might try to work out a payment plan with the IRS. And if you have federal student loans in default, you could consolidate them to "rehab" them and bring them current.
How long does bankruptcy stay on your credit?
Chapter 13 bankruptcies come off your credit report seven years from your filing date, and Chapter 7 bankruptcies come off 10 years after the filing date.
Like all negative information on your credit report, the effect grows smaller over time.
Note that although your credit report isn't public, bankruptcy is a public record available to anyone who makes an inquiry with your county recorder's office.
What are other options besides filing for bankruptcy?
If you need alternatives to bankruptcy, you have options. First, you could try to boost your income so you have more money to repay debts. You might work overtime, get a part-time job, move to a higher-paying employer, or pick up a side hustle. You could also sell things you don't need and use the money to repay your debt.
The debt snowball or debt avalanche methods could help you gain traction with debt repayment and potentially accelerate your payoff. You could also look into debt consolidation with a personal loan or home equity loan.
Debt management plans (DMPs) could give you a structured plan to repay what you owe, typically over a period of two to five years.
Debt resolution means negotiating with your creditors to accept less than what you owe and forgive the rest.
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