The Means Test

The choice of chapter 7or Chapter 13is a decision most Debtors voluntarily make.  However, in some cases the choice is made for the Debtor through the results of the Bankruptcy “Means Test”.  This test was added by Congress in 2005 to identify Debtors who can afford or have “the means” to pay some of their unsecured debts (for instance, credit card debt) and encourage repayment of these debts through a Chapter 13 repayment plan.  Debtors that do not “pass” Means Test are disqualified from filing Chapter 7 Bankruptcy.

Despite what you may have heard, many Debtors still qualify for chapter 7 relief, despite this additional hurdle.  If someone doesn’t qualify, Chapter 13 is still 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.  Here are the current median income figures for Debtors filing after March 15, 2011:

FAMILY SIZE

STATE
1 EARNER
2 PEOPLE
3 PEOPLE
4 PEOPLE *
Alabama
$38,642
$46,900
$52,460
$64,016
Alaska
$51,950
$75,460
$81,447
$85,964
Arizona
$42,603
$55,404
$59,659
$67,113
Arkansas
$32,834
$44,081
$49,599
$54,401
California
$48,009
$62,970
$68,670
$78,869
Colorado
$48,598
$64,679
$70,861
$83,976
Connecticut
$57,863
$71,961
$83,655
$103,314
Delaware
$48,415
$62,432
$68,518
$85,305
DC
$48,822
$80,172
$80,172
$80,172
Florida
$40,029
$50,130
$54,594
$65,135
Georgia
$39,384
$52,024
$56,682
$69,239
Hawaii
$50,664
$64,179
$75,670
$86,587
Idaho
$39,050
$48,648
$55,453
$61,480
Illinois
$46,355
$60,073
$69,910
$81,097
Indiana
$40,135
$51,104
$59,028
$69,226
Iowa
$40,456
$56,036
$63,510
$75,569
Kansas
$41,654
$57,174
$64,863
$69,272
Kentucky
$37,606
$45,081
$51,883
$63,768
Louisiana
$38,108
$46,704
$55,699
$67,239
Maine
$39,497
$51,600
$59,050
$68,466
Maryland
$55,774
$74,493
$87,152
$103,361
Massachusetts
$55,049
$68,243
$83,736
$102,110
Michigan
$42,562
$50,738
$60,161
$71,758
Minnesota
$45,760
$61,690
$74,082
$85,146
Mississippi
$32,658
$41,579
$47,058
$55,711
Missouri
$39,332
$51,120
$58,610
$69,832
Montana
$38,577
$52,412
$56,265
$67,921
Nebraska
$38,915
$54,124
$65,486
$71,097
Nevada
$43,041
$57,541
$60,783
$70,509
New Hampshire
$51,460
$63,534
$82,465
$89,990
New Jersey
$59,060
$70,680
$85,573
$101,106
New Mexico
$37,274
$51,855
$52,303
$53,709
New York
$46,295
$57,777
$68,396
$83,942
North Carolina
$37,781
$50,630
$55,468
$67,578
North Dakota
$41,443
$56,411
$69,328
$79,637
Ohio
$40,749
$51,319
$60,247
$72,625
Oklahoma
$36,884
$49,711
$54,135
$64,037
Oregon
$44,707
$55,553
$60,523
$72,767
Pennsylvania
$44,897
$53,706
$67,113
$79,916
Rhode Island
$46,136
$58,511
$72,184
$88,593
South Carolina
$37,055
$50,500
$52,738
$63,074
South Dakota
$35,582
$53,443
$58,794
$68,016
Tennessee
$38,144
$47,194
$53,227
$63,217
Texas
$38,294
$55,178
$56,445
$65,477
Utah
$50,635
$56,126
$61,944
$69,834
Vermont
$43,042
$57,948
$65,829
$78,392
Virginia
$50,296
$63,613
$73,260
$86,990
Washington
$49,930
$63,224
$72,524
$82,602
West Virginia
$39,750
$42,607
$51,350
$60,280
Wisconsin
$41,150
$56,080
$66,256
$77,438
Wyoming
$46,172
$60,829
$69,677
$76,361
* The Means Test adds $7,500 for each individual in excess of 4.

If your family’s income is less than your State’s median income for a family of your size, you “pass” the Means Test.  There is no other testing and you can proceed with a chapter 7 bankruptcy(provided you meet other requirements such as current payments on secured debts).

Part Two: Income, Expenses, and Deductions

If your current monthly income exceeds the State’s median, you must move to the second part of the Means Test, which calculates whether you have (or should have) “the means” to repay your unsecured creditors (at least some percentage).

In this 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 allowable expenses is known as your “disposable income.”  This disposable income amount is then multiplied by 60 to determine your disposable monthly income over the next five years.  If the total amount is less than $6000, then you have passed the Means Test and may file for Chapter 7 bankruptcy.  On the other hand, if your total is over $10,000 and you choose to file, the Court may ultimately dismiss your case.  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 Bankruptcy.

There are certain exceptions to this general rule, including recent unemployment, decrease in pay, 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.

DON’T WORRY!  YOU LIKELY QUALIFY DESPITE THE MEANS TEST

Despite what you may have heard over the past few years, very few Debtors fail the Means Test.  Many Debtors earn significant incomes and still qualify for Chapter 7 Bankruptcy.

Many of my clients with secured debts, such as a house or vehicle, often pass the Means Test, as there is no extra money at the end of the month to pay unsecured creditors.  Other factors that help support a Chapter 7 are child support payments, HOA dues, property taxes, and other necessary debts.