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A "means test" was added to the U.S. Bankruptcy Code in 2005 to create objective standards for determining which individuals qualify for relief under Chapter 7. It applies only to "individuals" and only those individuals whose debt is primarily consumer debt (as opposed to primarily business debt).
The means test is calculated by multiplying the debtors average gross monthly income for the past six months by twelve to "annualize" the income. The annualized income is then compared to the median family income for households of the same size in the debtors state of residence. If the debtors income is not more than the applicable state median income, the debtor "passes" the means test and may file under Chapter 7.
If the debtors annual income exceeds the state median income, a further analysis is performed looking at the debtors calculated ability to repay all or a portion of his debts over 60 months under a hypothetical Chapter 13 repayment plan. The debtors disposable income is calculated by subtracting a mix of actual and standardized expenses from his average income. "Disposable income" is the amount left over after subtracting all allowable actual and standardized expenses. If the debtor can pay $6,575 in five years or as little as $110.00/month to creditors, a presumption arises that a Chapter 7 filing is "abusive".
The presumption of abuse may be rebutted by the debtor by presenting facts and circumstances not provided for in the prescribed test. One frequently raised "special circumstance" is that the debtor is now unemployed or his income has otherwise decreased and he does not really have the ability to pay what the hypothetical means test suggests.
Approximately 85% of individuals filing under Chapter 7 are exempt from completing most of the means test form (Form B22A) because their annual income does not exceed the state median income. Those that are required to complete the entire means test form typically qualify for Chapter 7 anyway after completing the test.
Because the means test is based on average monthly income over the past 6 months (rather than the debtors actual current income, which may have changed), many bankruptcy courts essentially disregard the means test and determine a debtors eligibility for Chapter 7 by subtracting his monthly allowable living expenses from his current monthly income. If the debtor has no more than $110 left over each month after paying allowable living expenses he qualifies for Chapter 7, regardless of the amount of his annual gross income.
When determining median family income based on a debtors family size, the debtor should include himself, his spouse (unless separated), and any relatives (including children) for whom he provides at least one-half support, whether or not they reside with him. If the debtor has a girlfriend, fiance, etc., with whom he has resided as a single economic family unit for a long period of time, he may also include that person (and any children he supports) in determining his family size. However, if he includes an unmarried partner as a family member he must also include that persons income on his bankruptcy forms. The income of the debtors spouse must also be included in the means test unless the debtor and spouse are separated.
Individuals with regular income from any source that owe unsecured debts (no collateral) of less than $336,900 and secured debts (debts that are secured by collateral, such as mortgages and vehicle loans) of less than $1,010,650 qualify to file bankruptcy under Chapter 13 if they have at least $100 left over each month, after allowable living expenses, to contribute to a debt repayment plan.
In most Chapter 13 proceedings the primary issue is not whether the debtor qualifies, but rather how much
his monthly Chapter 13 plan payment should be. Chapter 13 debtors typically claim lots of allowable living expenses to show a low disposable income. A low disposable income results in a low Chapter 13 plan payment. Bankruptcy trustees review the debtors claimed expenses to ensure that the expenses are both allowable and reasonable in amount.
Qualifying for Bankruptcy