The Chapter 7 bankruptcy means test uses your gross income (income before taxes) to help determine whether you are eligible to file Chapter 7 bankruptcy. There are two parts to Chapter 7 means Test. The first part uses IRS allowed expenses to help determine whether you may qualify. The second uses your actual expenses.
The Chapter 7 Means Test Calculator below follows the protocol used by official US Bankruptcy Forms. We use the Chapter 7 Statement of Your Current Monthly Income (Form Number: B 122A-1) for our Chapter 7 means test calculator and the Chapter 7 Means Test Calculation (Form Number: B 122A-2) for our above median Chapter 7 calculator. The above-median calculator uses the second part of the means test. Related Reading: Are Disability Benefits and Social Security Income Exempt from the Bankruptcy Means Test?
The Chapter 7 Means Test Calculator below highlights whether you appear to qualify for a Chapter 7 bankruptcy in your state. Because the calculator is an estimate, your actual results may vary.
In short, the bankruptcy means test is the mechanism to help the courts determine whether you have the "means" to pay off some of your debt in Chapter 7 bankruptcy. You can think of it as similar to a bankruptcy qualification mechanism.
A Chapter 7 bankruptcy is a liquidation bankruptcy. In other words, this means that the sale of the nonexempt property and the distribution of the funds to the creditors owed can happen.
To qualify for Chapter 7, you must meet the income guidelines provided for your state and household number guidelines per your own state’s guidelines via the means testing. Ascend's chapter 7 means test calculator uses the most recent Census Bureau Median Family Income as of May 15, 2021, provided by the United States Department of Justice. The calculator is able to automatically pull the median income based on the zip code you provide and compare it to the income that you provide.
Of course, there are certain exemptions where you may still qualify for a Chapter 7 even though your income is above the median. However, these are on a case-by-case basis that we will address.
Related Reading: What Income Is Included in The Bankruptcy Means Test?
The bankruptcy means test may consider where you live in addition to both local and national standards when deciding disposable income. What this means is that you may not be able to use your real expenses that are higher than the allowed expenses to help reduce your disposable income.
There are some instances where you are able to use expenses such as car payments, childcare, mortgages, health insurance, and taxes to pass the Chapter 7 means test by deducting the actual expenses.
For example, let's say that you are a higher-earning debtor with income above the median based on your household size in your state. You may be able to pass the means test if you are able to reduce some of your actual expenses from your earnings for the means test. A qualified bankruptcy attorney should be able to walk you through this piece.
For expenses like car payments, childcare, mortgages, health insurance, taxes to mention but a few, you can pass the means test by deducting the actual expenses. For instance, let’s say that you are a high-earnings debtor. Do you know that you can still pass the means test if you also have a massive mortgage expense? This is because you can deduct the full mortgage amount from your earnings on the means test.
If you took the calculator above and it shows that you may not qualify, try taking the Chapter 7 Above Median Calculator to see whether you may still qualify for Chapter 7. The Above Median Calculator uses part 2 of the means test, specifically these bankruptcy forms: Statement of Exemption from Presumption of Abuse Under §707(b)(2) and the Chapter 7 Means Test Calculation.
Below is a picture of the actual means test form that our Chapter 7 means test calculator follows:
Now that you have an understanding of the bankruptcy means test, let's dig into how the Chapter 7 means test works.
The Chapter 7 means test considers various factors about you to decide whether or not you qualify for a Chapter 7 Bankruptcy. Some of these aspects include your expenses, income, and the size of your household.
The Chapter 7 means test is meant to help determine if the individual has disposable income to pay back debts and ultimately disqualify people who have high earnings from filing for a Chapter 7 Bankruptcy. This is well explained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA). In a nutshell, it calculates whether you can pay back part of what you owe.
As stated above, the Chapter 7 means test has two sections, all designed to determine if you have any disposable earnings that can go to offset your debt.
The Chapter 7 means test looks at your median monthly earnings for a 6-month period before you filed for bankruptcy versus the average income of your state. Here's how the bankruptcy form (Official Form 122A─1) words average income calculation, "Fill in the average monthly income that you received from all sources, derived during the 6 full months before you file this bankruptcy case. 11 U.S.C. § 101(10A). For example, if you are filing on September 15, the 6-month period would be March 1 through August 31. If the amount of your monthly income varied during the 6 months, add the income for all 6 months and divide the total by 6. Fill in the result. Do not include any income amount more than once. For example, if both spouses own the same rental property, but the income from that property in one column only. If you have nothing to report for any line, write $0 in the space."
Given how complicated the text above sounds, we built a simple bankruptcy average income calculator below to estimate your annual income in relation to the Chapter 7 means test. https://tryascend.com/embed/average_income_calculator
The Chapter 7 means test makes use of the information to decide whether any disposable earnings remain (after living expenses), which should go to your creditors. Now, depending on how much your income is, you might have to fill in the entire form, or you might sail through the test after a few simple stages.
If your earnings are below the average income for the state you live in, then filing for Chapter 7 bankruptcy may not be difficult. Remember that the median income is influenced by how big your household is and where you are located. For more information, check out Census Bureau Median Family Income By Family Size, which we also provided above.
What happens if you earn more than the state’s median? In such a case, the means test calculations get more complicated. Here, there can be possible outcomes:
Let’s say that your current earnings every month are not more than your state’s median income for the size of the household that you have. Or in simpler terms, your monthly income is less than the average income in your state. This generally means that you have passed the means test in the first stage and that you do not have to do the other parts of the test. It also implies that you may be able to file a Chapter 7 Bankruptcy.
It is vital to note that merely acing the test doesn’t mean that you automatically qualify for Chapter 7 bankruptcy. There may be additional forms that are needed for the court. These forms are the Schedule I: Your Income and Schedule J: Your Expenses. In the case where you have a large amount remaining after your disposable income after your monthly expenditures, the court may be interested to dig into that information further.
Finally, keep in mind that just because you are eligible for a Chapter 7 automatically means that you must file for bankruptcy. As such, you may want to consider all of the pros and cons of filing bankruptcy beforehand.
What happens to debtors if you are above-median income for your state? You may want to check out our in-depth article covering how to pass the Chapter 7 means test if you're income is above the median, but we will cover it briefly. If your average income is higher than your state's median income based on your household size, you do not automatically pass the means test.
Interestingly, the above scenario doesn’t imply that you automatically fail the bankruptcy means test either. It means that the bankruptcy process gets more complex and that there is additional work to do. In this case, the bankruptcy attorney may take a more granular look at your expenses.
One of the most common questions is, "What happens to my home or vehicle if I own a significant amount of equity in that asset?"
In many cases, some home equity is protected under exemptions. In this instance, you can check the bankruptcy homestead exemptions for your state to determine whether your house is at risk in a Chapter 7 bankruptcy.
If you are above the exemptions or do not qualify for Chapter 7, you may look to restructure your debts and make the payments through a Chapter 13 Bankruptcy.
The bankruptcy means test has different requirements based on the state where you reside. You can see the information related to your state in one of the guides below.
There are a few main alternatives to Chapter 7 Bankruptcy. Each debt relief alternative has its own set of pros and cons. Here are the main alternatives to Chapter 7 bankruptcy:
Below is our estimate of how Chapter 7 compares to other debt consolidation and debt relief options.
Not necessarily. For example, you could qualify for a Chapter 7 bankruptcy, but only have $100 in total debt. A Chapter 7 bankruptcy may be a drastic solution given such a low debt amount.
On the other hand, let’s say you have $300,000 in unsecured debt and recently lost your job, so you have no income. A Chapter 7 bankruptcy in this situation may make more sense, but it always depends on each situation and each individual.
We like to understand your goals for debt relief and your full financial picture before recommending to speak with a bankruptcy attorney. Use our free Chapter 7 means test calculator below to get started.