Income vs Debt Means Test (Chapter 7 Bankruptcy)

Overview

The Income vs Debt Means Test is used in Chapter 7 bankruptcy cases to determine whether an individual qualifies for Chapter 7 bankruptcy or if they may be required to file Chapter 13 bankruptcy instead.

The means test compares a debtor’s income to the median income for their state and evaluates their disposable income after allowed expenses. This test is required by the U.S. Bankruptcy Court and is calculated using Official Form 122A-2.

Step 1 – Compare Income to State Median

The first part of the means test compares the debtor’s current monthly income to the median income for a household of the same size in their state.

• If income is below the state median, the debtor usually qualifies for Chapter 7 and does not need to complete the full means test calculation.
• If income is above the state median, the debtor must complete the full means test calculation to determine disposable income.

Step 2 – Calculate Allowed Expenses

If income is above the median, the debtor must subtract allowed expenses from their income. These expenses are based on IRS national and local standards and include:

• Housing and utilities
• Transportation
• Food and clothing
• Taxes
• Insurance
• Healthcare
• Secured debt payments
• Child support or alimony
• Other necessary living expenses

These allowed expenses are not always the actual expenses but are often based on standard amounts set by the IRS.

Step 3 – Determine Disposable Income

After subtracting allowed expenses from monthly income, the remaining amount is called disposable income.

• If disposable income is very low or negative, the debtor may qualify for Chapter 7 bankruptcy.
• If disposable income is high enough to repay a portion of debts over time, the court may presume abuse and require the debtor to file Chapter 13 instead.

Income vs Debt Analysis

The means test ultimately compares disposable income to unsecured debt. If a debtor has enough disposable income to repay a certain amount of unsecured debt over five years, they may not qualify for Chapter 7.

• Low income plus high debt is more likely to qualify for Chapter 7
• High income plus ability to repay debt may require Chapter 13

The test ensures fairness by preventing individuals who can repay debts from discharging them under Chapter 7 bankruptcy.

Conclusion

The Income vs Debt Means Test is a financial formula used by bankruptcy courts to determine eligibility for Chapter 7 bankruptcy. It evaluates income, allowed expenses, and disposable income to determine whether a person has the ability to repay their debts.

Understanding the means test is important for anyone considering bankruptcy because it determines which type of bankruptcy they are allowed to file and whether their debts can be discharged or must be repaid through a repayment plan.