The Chapter 7 Means Test: Qualifying for Debt Liquidation

Filing for bankruptcy is one of the most significant financial decisions an individual can make. For those seeking a complete discharge of eligible debts, Chapter 7, or liquidation bankruptcy, is often the preferred path. However, access to this powerful relief is not automatic. The gateway to Chapter 7 is a mandatory financial evaluation known as the Means Test.

The Means Test was enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Its core purpose is to prevent an abuse of the bankruptcy system by ensuring that debtors who truly have the “means” or ability to repay a significant portion of their debts are instead directed toward a Chapter 13 repayment plan.

What is the Chapter 7 Means Test?

In simple terms, the Means Test is a statutory formula that compares your income and certain expenses to federal and state standards to determine if you are eligible for Chapter 7 bankruptcy. It is mandatory for most individual debtors whose debts are primarily consumer-related. If you pass the test, you proceed with a Chapter 7 filing. If you fail, you may still qualify for a Chapter 13 reorganization.

Step 1: The Median Income Comparison

The first step of the Means Test is the simplest and acts as the primary gatekeeper for Chapter 7 eligibility.

1. Calculate Your CMI

You must calculate your average monthly gross income from all sources—including wages, salary, business income, rental income, and retirement income (excluding most Social Security benefits)—over the six-month period preceding the filing month.

2. Compare to the State Median

Next, you compare your calculated CMI (annualized by multiplying the monthly average by 12) to the median income level for a household of your size in your state. These median figures are set by the federal government using U.S. Census Bureau data and are updated periodically.

The Median Income Test Outcome

Scenario	Result
Your CMI is Below the State Median	You Pass the Means Test and automatically qualify for Chapter 7. You skip Step 2.
Your CMI is Above the State Median	You must proceed to Step 2, the Disposable Income Calculation.

Step 2: The Disposable Income Calculation

If your income exceeds the state median, you still have a chance to qualify for Chapter 7 by demonstrating that your necessary expenses leave you with insufficient disposable income to repay your debts.

1. Allowed Expenses

In this step, you subtract a complex set of allowed expenses from your CMI. It is crucial to understand that you do not necessarily use your actual living expenses for every category. The test primarily uses standardized amounts established by the Internal Revenue Service (IRS) for categories like food, clothing, housing, utilities, and transportation, which vary based on family size and location.

However, you are allowed to use your actual expenses for specific items, such as:

• Secured debt payments (e.g., mortgage, car loan).
• Taxes and involuntary payroll deductions.
• Court-ordered payments (e.g., child support, alimony).
• Certain educational expenses for minor children.

2. The Presumption of Abuse

After subtracting all allowed expenses, the remaining amount is your monthly disposable income. This monthly figure is then multiplied by 60 (representing five years of repayment) to see if a “presumption of abuse” of the bankruptcy system arises.

Eligibility is typically determined based on the following federal thresholds (though these amounts are subject to change):

• If your projected disposable income over five years is less than $9,075, the presumption of abuse does not arise, and you likely qualify for Chapter 7.
• If your projected disposable income over five years is more than $15,150, a presumption of abuse arises, and you may be required to file for Chapter 13.
• If the amount falls between $9,075 and $15,150, further calculations are required to compare this amount to 25% of your unsecured debt. If your projected disposable income is less than 25% of your non-priority unsecured debt, you may still qualify for Chapter 7.

Exemptions from the Means Test

Not every individual filing Chapter 7 is required to complete the Means Test (Official Form 122A-2). There are two primary groups of filers who are exempt:

1. Non-Consumer Debtors: If the majority of your debt (more than 50%) is not considered “consumer debt” (e.g., business debt, tax debts, tort judgments), you are generally exempt from the Means Test. This is common for small business owners or those with significant business-related liabilities.
2. Disabled Veterans and Military Reservists: Certain veterans who incurred most of their debt while on active duty or performing homeland defense activities, particularly those with a service-connected disability of 30% or more, are exempt.

Summary: Key Takeaways on Chapter 7 Qualification

Navigating the Chapter 7 Means Test can be complex, requiring careful calculation and documentation. Here are the essential points to remember:

1. The Means Test is a two-part statutory calculation to determine if your income is low enough to qualify for Chapter 7 liquidation.
2. It begins with the Median Income Test, comparing your average gross income over the six months prior to filing against your state’s median income for your household size.
3. If your income is above the median, the test proceeds to the Disposable Income Calculation, where standardized and actual allowed expenses are subtracted from your income.
4. A high resulting disposable income over a five-year projection may create a “presumption of abuse,” potentially leading to a conversion to Chapter 13.
5. Consulting with an experienced Legal Expert is vital to ensure your CMI and allowed expenses are calculated accurately using the current forms (such as Official Form 122A-1 and 122A-2) and the correct regional data from the IRS and Census Bureau.

Frequently Asked Questions (FAQ)

Q: What income is excluded from the Means Test calculation?

A: The CMI calculation generally excludes all Social Security benefits (Social Security Disability Income or retirement) and certain payments to victims of war crimes or terrorism.

Q: What happens if I fail the Means Test?

A: If you fail the Means Test, you are typically ineligible to file for Chapter 7 liquidation. However, you may still be able to file for Chapter 13 bankruptcy, which involves a court-approved repayment plan over three to five years.

Q: Do I have to take the Means Test if I have no job?

A: Yes, generally. The test is based on your average income over the six months before filing. Even if you are currently unemployed, your average income from that previous six-month period determines whether you must proceed to Step 2 of the test. However, an experienced Legal Expert can help determine if a recent loss of income constitutes a special circumstance.

Q: Is the Means Test the only requirement for Chapter 7?

A: No. In addition to passing the Means Test (if required), you must complete a credit counseling course from an approved agency within 180 days before filing. You must also provide accurate and complete financial documentation, including schedules of assets, liabilities, and a statement of financial affairs.

A fresh start is achievable, but it requires careful navigation of federal bankruptcy requirements. Take the time to understand the Means Test, and be prepared to present a comprehensive and accurate picture of your financial situation to the court.

Chapter 7, Means Test, Bankruptcy, Liquidation, Disposable Income, Median Income, Chapter 13, Consumer Debt, US Bankruptcy Code, Current Monthly Income, Form 122A, Automatic Stay, Debt Discharge, Exempt Property, Credit Counseling