Income & “The Means Test”

The bankruptcy “Means Test” determines who can file for debt forgiveness through Chapter 7 bankruptcy.

It takes into account your income, expenses and family size to determine whether you have enough disposable income to repay your debts. Although it was designed to restrict the number of debtors who can get their debts forgiven through a Chapter 7 bankruptcy, most people who take the means test pass it easily.

Those who don’t qualify for Chapter 7 or who want to retain certain assets — like a house with equity over the allowable limit or a more expensive car — can choose instead to restructure their debts and pay them off through Chapter 13 bankruptcy.

Here’s how the test works and what it means for your bankruptcy case.

The test is only for those who have primarily consumer debts, like credit card or medical debt; you don’t need to pass the means test if your debt is mainly from a business you own. (See Footnote below about why.)

You are also exempt from the means test if you fall into certain military service categories.

For Chapter 13 bankruptcy, the test also plays a part in setting the repayment schedule.

The first part of the test is a determination of your average household income over the last six calendar months in comparison to Alaska’s median income for your household size. (Note: The Fed Gov’t updates the median income amounts for each State periodically.)

Income includes almost all of sources of income you may have including, but not limited to, business income, rental income, interested and dividends, pensions and retirements plans, VA benefits, amounts paid by others for your household expenses, and unemployment income. It does not include Social Security income.

1 Member Household – $61,539.00
2 Member Household – $80,474.00
3 Member Household – $81,427.00
4 Member Household – $97,465.00
Add $8,400 for each additional person

If you’re below the median income, you’ve passed the means test and can file for Chapter 7 bankruptcy.

However, if you are over the income limit, there’s a second part of the test which involves analyzing your income and expenses.

You will need to gather documentation about your expenses over the past six months. Things such as rent, groceries, clothing and medical costs make up what are called “allowable expenses.” What’s left after allowable expenses is deemed disposable income that could be put toward paying off debt.

What’s allowable is based on both national and local standards used by the IRS. National standards cover items like food and clothing, while local standards cover expenses like housing and car payments. Your lawyer will work with you to ensure that you have your expenses properly documented.

If your disposable income is shown to be low enough, you may still qualify for Chapter 7 at this point.

If you’re filing for Chapter 13 bankruptcy, either because you can’t meet the test for Chapter 7 or you want to keep some of your assets, the allowable-expenses portion of the test will be used when working out the terms of your repayment plan.

Footnote: Congress overhauled the Bankruptcy laws in 2005. Most of the changes were intended to affect individual consumers, not businesses and business owners. The “means test” in particular was not intended for present and former business owners. Apparently Congress did not want to discourage risk-taking among entrepreneurs, and left the door open wide for Chapter 7s by them. The mechanism that Congress used to divide between consumers who had to take and pass the “means test” and business owners who did not is a 3-word phrase: “primarily consumer debts.” All those with “primarily consumer debts” have to take the “means test” to qualify for Chapter 7 relief. Those without “primarily consumer debts” do not have to take the “means test.”

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