Bankruptcy Means Test

I am always asked questions about the bankruptcy means test, which is an objective standard of determining if a debtor qualifies for bankruptcy under Chapter 7. Old bankruptcy law often made it relatively easy for filers to meet the criteria since bankruptcy courts used considerable discretion in determining eligibility.

However, When Congress passed the Bankruptcy Protection Act of 2005 it took away the Courts ability to use considerable discretion in determining eligibility. As a result, most filers must now pass the bankruptcy means test to qualify for Chapter 7 bankruptcy. (Generally - The bankruptcy means test does not apply to disabled veterans that incurred debt while on active duty or while serving in homeland defense activities.)

The First Step to the Means Test

The first part the means test compares your average monthly income for the six months prior to filing for bankruptcy with the state's median family income. If your income is less than or equal to the state median income for a family of your size, then generally you can file for Chapter 7.

The income calculation should include the following sources:

• wages, salary, tips, bonuses, overtime, and commissions
• gross income from a business, profession, or a farm
• interest, dividends, royalties, pension and retirement income and annuity payments
• rental and real property income
• child support or spousal support
• unemployment compensation
• workers' compensation
• state disability payments

Income excluded from the calculation includes:

• Social Security retirement benefits and disability payments
• Tax refunds
• Supplemental Security Income
• Temporary Assistance for Needy Families

Second Step to The Means Test if you are over the Median Income

If you make more than their state's median income, it is necessary to complete the second part of the means test to determine eligibility. If after deducting all allowed expenses (actual and standardized expenses) your disposable income is enough to pay some portion of unsecured debt in a Chapter 13 repayment plan, then the debtor does not qualify for Chapter 7, unless there are special circumstances that you can prove to the court, which is generally a rare occurrence. Again the Bankruptcy Protection Act of 2005 took away the Courts ability to use considerable discretion.


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