The Bankruptcy Means Test
In 2005, Congress added the bankruptcy “means test” to identify people who have “the means” to pay their unsecured debts (such as credit card debt) and encourage repayment of these debts through a repayment plan under Chapter 13 of the Bankruptcy Code.
Despite this additional hurdle, many of our clients still qualify for Chapter 7 relief. If you don’t qualify for a Chapter 7 bankruptcy, Chapter 13 remains a great option with powerful relief.
Part One: Reviewing Your Median Income
The means test is divided into two parts, both of which focus on your income and expenses. The first part determines whether your current monthly income is less than your state’s median income for a household of your size.
In Texas, the current figures for cases filed after April 1, 2017 are the following:
- Household of 1: $46,709
- Household of 2: $61,704
- Household of 3: $65,713
- Household of 4: $76,842
- Additional $8,400 for each individual in excess of 4
Part Two: Income, Expenses, and Deductions
If your family’s income is less than your state’s median income for your household size, you “pass” the means test. There is no further analysis, and you can proceed with a Chapter 7 bankruptcy (provided you meet other legal requirements).
If your current monthly income exceeds the state’s median, you must proceed to the second part of the means test, which calculates whether you have “the means” to repay your unsecured creditors (at least some percentage).
In this second part, you must deduct certain expenses from your currently monthly income based on national standards set by the IRS. The amount remaining after deducting these allowed expenses is known as your “disposable income.” This disposable income amount is then multiplied by 60 to determine your disposable monthly income over a projected five-year period. If the total amount is less than $7,475.00, then you pass the means test and may proceed with Chapter 7. On the other hand, if your total is more than $12,475.00, Chapter 7 will usually not work (although every case is different and the means test calculation is not always accurate — which is a good reason to discuss your situation with an experienced bankruptcy attorney).
In the end, if you are able to pay all or some of your unsecured debt, you will be disqualified from filing for Chapter 7 relief. If this occurs, you can still seek protection under Chapter 13. There are certain exceptions to this general rule, including recent unemployment, decrease in your income, one-time bonuses, large family gifts, etc. It is critical to discuss your situation with an experienced bankruptcy lawyer to determine if an exception applies and you can still file for Chapter 7.
Many of our Clients Pass the Means Test for Chapter 7 Relief
The Chapter 7 means test is very complex requiring the expertise and knowledge of a Chapter 7 bankruptcy attorney to determine your eligibility.
While it may appear at first glance that you don’t qualify for Chapter 7 relief based on your current income and expenses, don’t give up. You may still qualify after a thorough analysis of your current and future financial situation. There are numerous issues to review, and our Firm can help with this examination.