How to Pass the Bankruptcy 7 Means Test: Chapter 7 Guide

Facing overwhelming debt and wondering if the bankruptcy 7 means test might be your path to financial freedom? You are not alone.

The test for Chapter 7 bankruptcy serves a specific purpose. Essentially, it limits Chapter 7 bankruptcy to those who truly can’t pay their debts. If you’re considering this route to financial recovery, understanding the bankruptcy means test is crucial for your success.

The process consists of two main parts. The first step is comparing your income to the average income in your state. If your gross income falls below your state’s median family income, you automatically pass the means test for bankruptcy and qualify for Chapter 7. For example, in Texas, a single-person household needs a household income below $41,354 to qualify. In North Carolina, the threshold is $61,789.

In this guide, we’ll walk you through exactly what the means test for Chapter 7 is, how to calculate your income correctly, and what options you have if you don’t initially qualify. Whether you’re just starting to explore bankruptcy or ready to take the next step, this straightforward explanation will help you understand if Chapter 7 bankruptcy is an option for your situation.

What Is the Bankruptcy 7 Means Test?

The bankruptcy 7 means test is a legal formula designed to determine who can file for Chapter 7 bankruptcy.

When you apply for bankruptcy protection, this test evaluates your financial situation to see if you qualify for debt discharge through Chapter 7 or if you should instead file for Chapter 13 bankruptcy.

Why the bankruptcy 7 means test exists

Congress created the means test in 2005 to prevent abuse of the bankruptcy system. The primary purpose involves ensuring that individuals who can afford to repay at least some of their debts do so through monthly payments under Chapter 13 rather than wiping them out completely in Chapter 7.

Essentially, the means test examines your ability to pay creditors.

Without this screening mechanism, higher-income individuals might choose Chapter 7 even when they have sufficient resources to make reasonable payments toward their debts.

Who needs to take the bankruptcy 7 means test

Not everyone filing for bankruptcy needs to complete the full means test. You must take the test if:

• Your income exceeds your state’s median for a household of your size
• Your debts are primarily consumer debts (rather than business debt)

However, certain individuals are exempt from the means test, including:

• Any disabled veteran who incurred debt primarily during active duty
• Those whose debts are not primarily consumer debts

How the bankruptcy 7 means test affects your bankruptcy eligibility

The means test directly determines whether you can proceed with Chapter 7 bankruptcy. The test follows a two-step process:

First, your current monthly income (averaged over the past six months) is compared to your state’s median income for a similar household size. If your income falls below this threshold, you automatically pass and can file Chapter 7.

Should your income exceed the state median income level, you move to the second step, which is calculating your disposable income by subtracting allowed monthly expenses from your current income. If calculations show minimal disposable income, you may still qualify for Chapter 7. However, if your disposable income is too high, you’ll need to consider Chapter 13 bankruptcy instead.

Remember that passing the means test doesn’t guarantee Chapter 7 eligibility. The bankruptcy court will additionally review your Schedule I (Income) and Schedule J (Expenses) forms to confirm that filing Chapter 7 isn’t an abuse of the bankruptcy system.

Step 1: Compare Your Income to the State Median

The first hurdle in the bankruptcy 7 means test begins with a straightforward income comparison. This initial step determines whether you need to complete the more complex parts of the test or if you automatically qualify for Chapter 7.

How to calculate your average monthly income

Calculating your current monthly income for the means test for bankruptcy requires looking back at a specific timeframe. You’ll need to determine your average gross monthly income from all qualifying sources of income for the six full calendar months before filing. For example, if you plan to file in June, you’d use income from December through May. This timing matters for your filing date, especially if you receive irregular income or bonuses.

After totaling how much money you made in the past 6 months, divide by six to get your monthly average, then multiply by 12 to calculate your annual income for comparison purposes.

Where to find your state’s median income

The official, up-to-date median income figures are published on the U.S. Trustee Program website. These numbers change several times yearly, so relying on outdated information from general internet searches could lead to mistakes.

The median income varies based on your state and household size. For example, as of November 2023, New Jersey’s median annual income was $79,816 for a single person, $96,779 for a family of two, and $125,090 for a family of three.

What income sources count and what don’t

For the Chapter 7 means test, you must include:

• Wages and salary (before taxes)
• Business and self-employment income
• Rental income
• Alimony and child support
• Regular financial help from others
• Retirement income and pensions
• Unemployment compensation

Notably, certain income sources are excluded:

• Social Security benefits (SSI and SSDI)
• Benefits under the HAVEN Act for military service members
• Payments for being a victim of certain crimes[121]

If your calculated annual income falls below your state’s median, congratulations, you’ve passed the first part of the means test for chapter 7 and can proceed with filing Chapter 7 bankruptcy.

Step 2: Deduct Allowed Expenses to Find Disposable Income

For individuals whose income exceeds the state median, the bankruptcy 7 means test continues with a crucial second step. This is calculating your disposable income by deducting allowable expenses.

Standard vs actual expenses

The means test for bankruptcy uses a combination of standardized allowances and your actual expenses. Consequently, some deductions use predetermined amounts regardless of what you actually spend, whereas others use your real expenses. This hybrid approach ensures consistency while acknowledging individual financial circumstances.

IRS national and local standards

The IRS establishes both national and local standards that form the foundation of allowable deductions:

• National standards cover food, clothing, housekeeping supplies, personal care, and miscellaneous items
• Local standards apply to housing, utilities, and transportation costs based on your location

Secured debt and priority payments

Furthermore, you may deduct payments for secured debts like mortgages and car loans by calculating the average monthly payment over the next 60 months. Priority debts such as past-due child support, alimony, and certain taxes can likewise be deducted.

Administrative and special expenses

Administrative expenses include the theoretical cost of a Chapter 13 bankruptcy (typically 6-8% of your plan payments). The test also allows deductions for special circumstances like ongoing medical conditions or military service that justify additional expenses.

After subtracting all allowable or necessary expenses, any remaining disposable income determines your eligibility for Chapter 7.

What Happens If You Fail the Bankruptcy 7 Means Test?

Failed the bankruptcy 7 means test? Don’t worry, you still have several options to consider. Failing simply means your income is too high to qualify for Chapter 7 under current guidelines, as the test ensures this relief is reserved for people who truly cannot repay their debts.

Chapter 13 as an alternative bankruptcy option

Most people who don’t pass the means test for bankruptcy because their total income after allowed expenses is too high end up filing Chapter 13 instead. Unlike Chapter 7’s immediate debt elimination, Chapter 13 allows you to reorganize debts into a manageable repayment plan lasting three to five years. This approach offers several advantages:

• You can keep your personal property rather than having it liquidated
• You’ll have protection from foreclosure if you’re behind on mortgage payments
• At the plan’s completion, remaining qualifying debts may be discharged

Chapter 13 works best for individuals with a steady income who want to retain certain assets.

Delaying your filing to qualify later

Sometimes timing makes all the difference. If your income has recently decreased but your six-month average remains high, postponing your filing could help you pass the Chapter 7 means test later. Since the test calculates your average income over the previous six months, sometimes, the best way to pass the means test is to wait until higher-income months drop off your calculation.

Special circumstances that may apply

Despite failing the means test for Chapter 7, you might still qualify through special circumstances:

• Serious medical conditions affecting your ability to manage debt
• Active military duty
• Recent loss of overtime pay

Additionally, certain individuals can receive a statement of exemption from taking the test entirely:

• Disabled veterans
• National Guard/military reserve personnel
• People with primarily business debts (not consumer debts)

Conclusion: The Bankruptcy 7 Means Test is Just a Tool to Find Your Path

Navigating the bankruptcy means test might seem overwhelming at first, but understanding this process remains essential for anyone considering a fresh start with Chapter 7 bankruptcy. Above all, remember that this test exists for a specific reason – ensuring those who truly cannot pay their debts have access to Chapter 7 relief while directing others to appropriate alternatives.

The two-step process begins with a straightforward income comparison. First, you calculate your current monthly income using the official bankruptcy forms and compare it to your state’s median figures. Subsequently, if your income exceeds this threshold, you must calculate your disposable income by subtracting allowed household expenses. This calculation ultimately determines whether Chapter 7 bankruptcy remains viable for your situation.

Failing the means test doesn’t mean you lack options. Instead, Chapter 13 bankruptcy offers a structured path to manage your debts through a payment plan. Additionally, timing your filing strategically or proving special circumstances might still open the Chapter 7 door even after an initial failure.

Regardless of which bankruptcy path proves right for you, taking this step demonstrates courage and commitment to addressing your financial challenges. Financial freedom remains possible, whether through immediate debt discharge with Chapter 7 or the structured repayment approach of Chapter 13. Most importantly, you now have the knowledge to make informed decisions about your financial future and take control of your debt situation once again.