The means test was added to the Bankruptcy Code to create objective standards for determining which individuals are “worthy” of relief in Chapter 7.
(Really, it was added to the code to scare off debtors, but that’s another story).
It applies only to individuals and just to those individuals whose debt is primarily consumer debt. If your debt is more than 50% business or tax debt, you don’t have to take the means test.
How the means test works
The means test is calculated by comparing the debtor’s average income for the past six months (current monthly income), annualized, to the median income for households of the same size in the debtor’s state of residence.
If the debtor’s income is less than or equal to the state median income, the debtor “passes” the means test on the first try and may file Chapter 7.
If the income is above median, there’s another calculation, using a combination of real and standardized expenses. You pass that second part of the test if your disposable income, according to Congress’s calculation, leaves you too little money to pay something meaningful on your debts.
Means test for above median households
If the debtor’s income exceeds state median income, you do some more figuring, looking at the debtor’s calculated ability to fund a Chapter 13 plan.
The debtor’s disposable income is calculated applying a mix of actual and standardized expenses, going forward, to the debtor’s previous average income! Here’s the official form on which this is calculated.
If the debtor can pay $12, 475 in five years or as little as $208/month to creditors, a presumption arises that a Chapter 7 filing is “abusive”.
The presumption of abuse may be rebutted by the debtor by presenting facts and circumstances not provided for in the prescribed test. One obvious “special circumstance” might be that the debtor is now unemployed and doesn’t really have the ability to pay what the artificial test suggests.
Chapter 13 available if you don’t pass
Failing the means test does not mean you can’t file bankruptcy. It simply means that Chapter 7 is not available, now.
A word of caution: although there are forms and calculators that say you can run the means test yourself, at home on your computer, don’t rely on any DIY results. The means test is tricky, counter intuitive, and non obvious.
If you’re considering bankruptcy, see an experienced bankruptcy lawyer.
Thoughts on finding a good lawyer.
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