STEP 2: The Means Based Test - Do I Qualify?
Before you file Chapter 7 bankruptcy, you must complete the Chapter 7 "means based test." The means test tells the court that you’re truly in need of having your debts discharged and you’re not trying to “abuse” the system.
The means test is a straight-forward test and most debtors qualify to file Chapter 7 bankruptcy.
The test is divided into two parts and both focus on your income and expenses.
PART 1: Chapter 7 Means Test
What is Your Household's Monthly Income?
The first part of the test compares your monthly income (which is determined by a worksheet that the your attorney will provide) to the median income for your geographic area and household size. If your monthly income is at or below your state median income level, the means test is over—there is no presumption of abuse and you can file for Chapter 7 bankruptcy.
The median will vary fairly significantly according to your geographic location and the size of your family. In general, in the DC Metro area, Maryland has the most generous income limits.
In order to get it right, the court requires that you count (add up) the income of everyone living at your house. This includes your income, your spouse's, your children, grandparents, anyone. The only exception is if you have roommates or renters. Their income will not count against you and your attorney will help you with this.
Look at this chart for 2009 and see where you are at:
If you have more than 4 people living at your house, then you may be entitled to a slightly higher income limit -- except in DC! $72,724 is the maximum.
The U.S. Trustee’s Office issues new income limits yearly. Please check their website for the most up-to-date median incomes for your state; your attorney can advise you if you have more members of a family.
If your Monthly Income is at or below what this chart indicates, STOP HERE. YOU QUALIFY FOR CHAPTER 7 PROTECTIONS. Move on to the next Step on the website.
If your Monthly Income is above what this chart indicates, don't worry. You can still qualify for Chapter 7 protections, you just have to do one more step.
PART 2: Chapter 7 Means Test
What are your Expenses & Disposable Income?
If you find that your income exceeds the state median, it doesn’t necessarily mean that you won’t be able to file under Chapter 7. This just means you must move on to the second part of the test. During the second step, you will deduct certain allowable expenses from your monthly income based on IRS standards. After you take your income, subtract your allowable expenses, this leaves you with your "disposable income."
FIRST, Add up everything that you spend money on each month -- credit card bills, loans, payments, debts, child care and child support, even your coffees and newspapers! Everything. Don't leave a penny off!
SECOND, you need to figure out what expenses are "allowable?" This is a bit harder and your attorney can really help you out. The result will be your "Expenses."
THIRD, subtract your Expenses from your Monthly Income. The result will be your Disposable Income.
FOURTH, multiply Disposable Income by 60. (This is their way of figuring how how much disposable monthly income you will have over the next 5 years, or 60 months.)
If your total disposable income over 5 years is less than $6,000, then you have passed the means test, and you may file bankruptcy under Chapter 7, since there is no presumption of abuse. On the other hand, if the total is over $10,000, then there is a presumption of abuse, though you will be given the chance to include additional necessary expenses to reduce your monthly income.
However, if your total disposable income for the five-year period falls between $6000 and $10,000, then you must make one more calculation. For this step, you will take your expected disposable income over the next five years and compare it to the total amount of your non-priority unsecured debts.
If your disposable income is less than 25% of the total of those debts, there is no presumption of abuse, and you therefore qualify to file under Chapter 7. Just as before, you will have the opportunity to show special circumstances that justify the inclusion of additional expenses.
Chapter 7 Means Test = Summary
In short, the means test works like this:
Compare your monthly income to the state median:
- If your income is at or below the state median, the presumption does not arise and you “pass” the means test;
- If your income is above the state median, go on to calculate your disposable income for the upcoming five year period.
Calculate your disposable income over the upcoming five years:
- If that number is below $6000, the presumption does not arise and you “pass” the means test;
- If that number is above $10,000, the presumption does arise, and you can file under Chapter 7 only with a showing of special circumstances;
- If that number is between $6000 and $10,000, calculate 25% of your outstanding unsecured, non-priority debts.
Multiply your outstanding unsecured, non-priority debts by .25:
- If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts, the presumption arises and you can file under Chapter 7 only with a showing of special circumstances;
- If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts, you “pass” the means test and can file under Chapter 7.
Even if you’ve passed the means test, you should know that the bankruptcy trustee can still throw your case out for abuse if he deems that your particular case warrants it.
In any case, your bankruptcy lawyer can give you more specific advice about what kinds of circumstances might cause a trustee to challenge or dispute your bankruptcy case. And, if you get confused or want your attorney to take a second look to see if you qualify under the means based test, CALL YOUR LAWYER. That's his job. Don't worry, he is there to help you out any way possible.