The “chapter 7 means test” sounds like a big, complicated, ominous test. But it is usually pretty straight forward. Here are four things you should know about the means test.
1. What is the Chapter 7 Means Test?
The Chapter 7 Means Test is a measure of your current income level that determines whether you are eligible to file for Chapter 7 bankruptcy. If you do not “pass” the Chapter 7 means test, you can still file for bankruptcy, but you will need to do so under chapter 13, or chapter 11.
2. Why is there a Chapter 7 Means Test?
To put it simply, the Chapter 7 Means Test was added to the bankruptcy code in order to prevent too many people from declaring chapter 7 bankruptcy. Chapter 7 bankruptcy, also known as “liquidation” and “straight bankruptcy” is an extremely powerful legal tool; your creditors do not want you to file chapter 7 bankruptcy. The idea behind the means test is to put an income limit on chapter 7 bankruptcy filings. The rationale behind the means test is that if you earn more than a certain amount, you are not able to use the super-powerful chapter 7 bankruptcy, because you should have the “means” to pay something more back to your creditors, and you should be forced to file under chapter 13 instead.
Whether this is true in practicality is another story, of course, but the as it stands today, the law says you have to pass the means test in order to file under Chapter 7. So let’s look at what the limits are.
3. What are the income limits for Chapter 7?
The concept behind the means test, and its application are usually pretty straightforward. It can be as simple as this: is your current monthly income greater than the median income of your state? If so, you cannot file under chapter 7.
The median income is determined by the census bureau on a state-by-state basis, and is adjusted according to family size. Thus, if your family size is 4, your current monthly income limit is greater than if your family size is 2.
The median income numbers change frequently, so I won’t go into detail about what they are. But to give you some general idea, in Utah, the median incomes fall between 52,000 and 72,000 per year. You can find exact information about current median incomes on the U.S. Trustee Program website.
4. How is your income calculated?
The means test uses your “current monthly income” to determine chapter 7 eligibility. Your current monthly income is defined as your average gross monthly income over the 6 month period before filing your petition.
Thus, someone who was wearing well above the median income, and then lost their job might not be eligible to file under Chapter 7 for a few months until their zero income period brings their average monthly income down.
Ironically, the reverse is also true. If a person is unemployed for an extended period, and then obtains a high-paying job, they will still be eligible to file chapter 7 bankruptcy for a couple of months until their new income brings their average up!