Prior to filing a bankruptcy petition, a debtor must complete a “means test” calculation to determine eligibility for Chapter 7 bankruptcy. This test is based upon figures from the U.S. Census Bureau and the Internal Revenue Service regarding the median income and expenses for individuals in a particular state. A debtor must provide proof of this calculation in a bankruptcy petition. The purpose of a means test is to limit Chapter 7 bankruptcy to only those debtors who truly cannot repay their debts. If a debtor has is able to repay his debts, the court will require the debtor to file a Chapter 13 bankruptcy.
The new means test, established by Congress in 2005, will result in more people repaying their debts under Chapter 13 rather than wiping out their debts under Chapter 7. While a wider range of debts can be discharged under Chapter 13 than in Chapter 7, debtors are forced to attempt repayment for five years. Debtors who fail to meet the requirements of the means test risk having their Chapter 7 petition dismissed for abuse and having the petition converted into a Chapter 13 bankruptcy.
Step One: Compare Income to Median Income
The means test involves a two-step process. In the first step, the petitioner declares his income for the six months preceding the bankruptcy petition filing date. The court then compares the state median income of a person with the same family size to the petitioner’s income. The U.S. Census Bureau provides these median income figures. If the petitioner’s income is less than that of the median income, he is eligible to file a Chapter 7 petition. If not, the second step must be completed.
Step Two: Calculate Debtor’s Disposable Income over a Five-Year Period
In the second step, the petitioner’s estimated income, minus living expenses, is calculated for the five-year period following the bankruptcy filing. This is the petitioner’s “disposable income” that will be used to repay his debts. The deductible living expenses are based on IRS figures, not the actual living expenses of the petitioner. Thus, a petitioner whose living expenses exceed these guidelines will not be afforded full credit for those expenses.
If the petitioner’s disposable income over a five-year period exceeds $10,000, the petitioner will be limited to filing a Chapter 13 petition, unless the petitioner can prove special circumstances necessitating Chapter 7 bankruptcy. If the disposable income is less than $6,000, a petitioner is allowed to file Chapter 7.
However, if the disposable income falls into the range of $6,000 to $10,000, an additional calculation is required. The debtor must calculate his income as measured against his debt. Debtors whose income will be less than 25% of their debt are allowed to file Chapter 7. Debtors whose income will exceed 25% of their debt must file for Chapter 13 bankruptcy.