Bankruptcy Means-Test

Chapter 7 Bankruptcy

For many years before the Bankruptcy Code was amended, Chapter 7 Bankruptcy laws were interepreted somewhat loosely. As a result, bankruptcies were sometimes administered in an inconsistent manner, relying largely on personal discretion. Under the old laws, two debtors with similiar situations might find themselves with different outcomes. In order to create a more objective standard for determining one's qualification for Chapter 7 Bankruptcy, Congress passed the Bankruptcy Protection Act of 2005, in turn creating the Bankruptcy Means-Test.

What is the Means-Test?

In summary, the Bankruptcy Means-Test is a two part test designed to determine whether a debtor is a suitable candidate for a Chapter 7 Bankruptcy (also known as an "asset liquidation").

In part one of the Bankruptcy Means-Test, the debtor will compete an income calculation. The debtor must submit their average monthly income for the 6 months prior to filing for bankruptcy. If their average monthly income for their household is less than or equal to the median household income for their state they will qualify under the Bankruptcy Means test. Find out the means-test calculations in your jurisdiction at the U.S. Department of Justice website.

If a debtor fails to meet the requirements of part one, they will have to partake in the second part of the means-test. In part two, the debtor's finances will be further examined. If the debt has enough disposable income to pay some amount towards a Chapter 13 repayment plan after removing all the allowable deductible expenses, they will not qualify.

Take Note: Even if a debtor passes the Means-Test, it is still possible that the bankruptcy trustee may further examine the debtor’s financials. If the Trustee determines that after paying their paying their basic necessities, the debtor has enough disposable income to pay a chapter 13 repayment plan, the trustee can submit their findings to the judge. The judge may decide whether to reject the debtor's request for Chapter 7.

Special Circumstances and Exemptions to the Means-Test

In many cases, if the Debtor fails the Means-test, the case will either be dismissed, or converted into a Chapter 13 Bankruptcy. However, the debtor can oppose the motion to dismiss by attempting to prove they are a special circumstance. Special circumstances may include recent events that wouldn't have impacted the debtor's 6 month average household income. These special circumstances would be recent life changing events such as unemployment, development of a serious illness/medical condition, or excessive rent hikes. If the debtor is able to provide documentation for the special circumstances, and they are able to explain the necessity, the court could adjust the debtor’s expenses for the means-test and grant eligibility for Chapter 7.

There are some debts that grant a debtor exemption from having to take the Bankruptcy Means-Test. If the debts are primarily a result of non-consumer debt, such as operating a business, the debtor would not be subjected to the means-test.

Disabled veterans might also qualify for exemption from the Means Test by meeting certain standards. If the Veteran has a disability rating of at least 30 percent and at least half their debt was garnered while on active duty, they may be exempt from the Means-Test.