If you are struggling with debt and considering filing for bankruptcy, one of the first things you will likely hear about is the “means test.” This test plays a central role in determining your eligibility for filing Chapter 7 bankruptcy. It was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, and it was designed to ensure that individuals who have the ability to repay their debts do not simply walk away from their financial obligations through Chapter 7.
Understanding what the means test is, how it works, and what it determines is essential for anyone considering bankruptcy. Since this is a common question we hear from most clients, we will break down the key aspects of the means test and explain why it is important.
What is the purpose of the means test?
The means test is a specific formula used to determine whether a debtor has enough disposable income to repay some or all of their unsecured debts. In essence, it is used to screen out individuals who earn more than a certain threshold and can afford to pay back a portion of what they owe through a Chapter 13 repayment plan rather than liquidating their debts through Chapter 7.
The underlying goal of the means test is to prevent abuse of the bankruptcy system by individuals who have sufficient income to pay off creditors over time. By applying a standardized calculation, the means test adds a layer of accountability and fairness to the bankruptcy process.
How does the means test work?
The means test involves a two-step analysis of your income and expenses:
Step one: Compare your income to the median income in your state
The first step is to calculate your current monthly income, which is based on your average income over the six months prior to filing for bankruptcy. This includes income from all sources, including wages, bonuses, rental income, and even regular financial support from friends or family members.
Your income is then compared to the median income for a household of your size in Texas. If your income is below the median, you automatically pass the means test and qualify to file for Chapter 7 bankruptcy.
In Texas, the median income for a family of four is adjusted periodically, so it is important to use the most current data when performing the test. If your income falls below that threshold, no further calculations are necessary.
Step two: Determine disposable income
If your income is above the median, the second part of the means test comes into play. This involves a detailed calculation of your allowable expenses and your remaining disposable income.
Allowable expenses are based in part on IRS standards and include categories such as housing, food, transportation, healthcare, and insurance. These are not necessarily your actual expenses, but rather standardized amounts deemed reasonable by the IRS.
Once your allowable expenses are subtracted from your income, the amount left over is your disposable income. If your disposable income is too high, the court may presume that you have the means to repay your debts through Chapter 13, and you may not be allowed to file under Chapter 7.
What does the means test determine?
Ultimately, the means test determines whether you can proceed with a Chapter 7 bankruptcy or whether you are instead required to pursue a Chapter 13 repayment plan. It is not an assessment of whether you deserve debt relief, but rather a legal requirement meant to channel higher-income individuals toward a structured repayment process.
It is important to understand that passing the means test does not guarantee that your Chapter 7 bankruptcy will be approved. It simply establishes that your income and financial situation meet the initial requirements for this type of filing. Other factors can also affect the outcome, such as your financial history, asset disclosures, and prior bankruptcy filings.
On the other hand, failing the means test does not mean you are out of options. Chapter 13 bankruptcy may still offer a viable and effective way to restructure your debts, protect your assets, and regain financial stability.
Exceptions to the means test
There are certain circumstances in which an individual may not be required to take the means test. One of the most common exceptions applies to individuals whose debts are primarily non-consumer debts, such as business-related obligations. Additionally, disabled veterans who incurred debts primarily during active duty may also be exempt from the means test.
If you believe you may qualify for an exemption, it is critical to discuss your situation with a qualified bankruptcy attorney who can evaluate your eligibility.
Why professional guidance matters
The means test is not always straightforward. It involves complex calculations, strict documentation requirements, and evolving median income thresholds. Making a mistake or misinterpreting the rules can result in a delay in your case or even a dismissal of your bankruptcy petition.
Because every financial situation is unique, it is essential to consult with an experienced bankruptcy attorney who can provide guidance tailored to your circumstances.
Contact Rubin & Associates for a free consultation
If you are struggling with debt and wondering whether you qualify for Chapter 7 bankruptcy, the means test is a critical first step. At Rubin & Associates, our team of experienced bankruptcy attorneys will walk you through the process, explain your options, and make sure the means test is applied correctly to your specific financial situation.
Do not try to navigate this complex process alone. Call Rubin & Associates today at 214-760-7777 to schedule a free consultation. We will answer all of your questions, help you understand your rights, and guide you toward a fresh financial start.