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.
What is the Bankruptcy Means Test?
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 provided 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.
Bankruptcy Means Test Part 1: Using IRS Accepted Figures
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.
Bankruptcy Means Test Part 2: Using Actual Expenses
There are some instances where you are able to use such expenses 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? Yes! This is because you can deduct the full mortgage amount from your earnings on the means test.
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.
What is the Chapter 7 Means Test Process?
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 family (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.
Chapter 7 Means Test Process
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 the half-year 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.
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 and where you are located (For more information, check this 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:
For a monthly income below the state median, you may sail through the test and be eligible for Chapter 7 bankruptcy.
For a monthly income above the state median, you may have to look at additional things to determine whether you qualify.
Passing Chapter 7 Means Test (Income < State Median)
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 there 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.
Passing Chapter 7 Means Test (Income > State Median)
What happens to debtors if you are above-median income for your state? You may want to check out our in-depth 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.
What If I Pass the Bankruptcy Means Test But Own Property?
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.
Now that we understand the Chapter 7 means test, let's cover how bankruptcy works, specifically Chapter 7.
How a Chapter 7 Bankruptcy Works
Chapter 7 bankruptcy is often a faster form of debt relief. Unlike filing for Chapter 13, it does not involve submitting a repayment plan which can be estimated through a Chapter 13 Payment Calculator but instead involves the gathering and selling of non-exempt assets in order to pay creditors, through a liquidation process. However, the debtor is allowed to keep their exempt assets in accordance with the Bankruptcy Code. Typically however going through with a Chapter 7 bankruptcy guarantees a loss in property.
Chapter 7 Bankruptcy Eligibility
We discussed eligibility via the bankruptcy means test above, but we will provide a bit more light here.
Individuals, partnerships, corporations, and business entities are all eligible to qualify for Chapter 7 bankruptcy.
However, there are two specific cases in which individuals cannot file for any form of bankruptcy. The first being that if in the 180 days prior to filing, their bankruptcy petition was rejected due to the debtor’s failure to comply in a variety of ways. The other case is if in the 180 days prior to filing the debtor has not sought approved credit counseling.
Additionally, one of the purposes of bankruptcy is to allow individual debtors to have a new start by discharging their debts and removing the responsibility of those debts. Thus with Chapter 7 specifically, this removal of debts can only be given to individuals, not corporations or business entities. However, this individual’s right to having debts discharged is not a guarantee, as it is not possible with certain types of debt, such as those related to property.
Chapter 7 Bankruptcy Process
To begin the Chapter 7 bankruptcy process, the first step is for the debtor to file a petition with the bankruptcy court nearest to them or their place of business. They must also submit a variety of personal finance documents to the court, such as statements in regards to financial affairs and unexpired leases. Additionally, a copy of their tax return from the recent tax year and any returns during the duration of the case are to be presented to the assigned case trustee.
For individuals specifically, there are additional documents to file. This includes a certificate of credit counseling, a copy of any debt repayment plan from credit counseling, and proof of employer payment from 60 days prior to filing (the complete list of documents required here).
Before filing, a variety of fees for the filing process must be paid to the bankruptcy court. If needed, individuals debtors can pay these in up to four installments, though there are exceptions to that limit.
In order to have completed the Official Bankruptcy Forms, debtors must provide the following information:
A list of all creditors and the amount and nature of their claims;
The source, amount, and frequency of the debtor's income;
A list of all of the debtor's property; and
A detailed list of the debtor's monthly living expenses, i.e., food, clothing, shelter, utilities, taxes, transportation, medicine, etc.
Married individuals, regardless of who is the one filing, must include this information for their spouse as well. This is only done so that the bankruptcy court can properly evaluate the financial situation of the household. You may submit a schedule of properties from which you are exempt; these corresponding properties are determined and protected by federal or state bankruptcy laws. To know what is exempt in your state, it is best to contact a bankruptcy attorney.
When filing for Chapter 7, there are a few things to remember. The action of filing will automatically place a stop on most creditors and collection agencies. When someone files, a bankruptcy clerk will give notice to all creditors provided by the debtor of their filing. Additionally, between 21 and 40 days after filing, a meeting will be held by the case trustee between the debtor who will be under oath and the creditor. During this meeting, the case trustee and creditors will ask questions, in which cooperation is key. Things such as financial documents may be requested. One of the goals of the meeting is to ensure that the debtor is fully aware of the process and results of Chapter 7 as well as the alternatives. The Bankruptcy Code does allow for Chapter 7 bankruptcy cases to be converted to Chapter 11, 12, 13 as long as they are still eligible.
Understanding a Chapter 7 Discharge
A Chapter 7 discharge only applies to individuals filing for Chapter 7. When granted Chapter 7 discharge, responsibility for your debts is removed and creditors can no longer collect take action towards your debt. According to the United States Courts, apart from the exceptions, individuals receive this discharge 99 percent of the time. This usually occurs within 60 to 90 days after the first meeting set with creditors.
Concerning the probability of being denied a discharge, the chances are few and far between. However, the cases for such an occurrence are all listed here. These reasons include failing to keep adequate financial records or failing to follow an order from the bankruptcy court.
In some cases, even after a discharge is given, creditors may come after underlying debt by taking away property. If the debtor wishes to prevent this, they must “reaffirm” their debt. In other words, they have to make an agreement to pay all or some of the debts owed to the creditor that would have otherwise been waived through the process of bankruptcy. As long as the debtor continues to pay the debt, they cannot take away property. Reaffirming must take place before the discharge is granted by submitting a written agreement to the court. Within this agreement, specific disclosures are required to be filed, including how much debt is being reaffirmed as well as proof that the debtor’s current income is sufficient to pay the debt. If this is not the case, the court may not approve the reaffirmation agreement. However, if the debtor is not represented by an attorney, the bankruptcy judge is required to approve the agreement. With an attorney, they will be required to confirm that reaffirmation will not bring any harm to the debtor. Most importantly, the debtor must be paying the debts voluntarily in any case.
Although most debts are discharged through Chapter 7, there are a few situations in which this is not possible. These cases include debts from educational loans and personal injury from driving under the influence. Certain debts are guaranteed to be discharged unless a creditor files to have the debts made dischargeable.
The court reserves the right to remove a discharge by request of the trustee, creditor, or a federal trustee in defined instances, such as the discharge having been obtained through fraud.
Chapter 7 Bankruptcy Pros
While Chapter 7 is one of the more severe bankruptcies, there are many pros to consider when deciding whether this debt relief solution is best for you. Here are the pros:
You may receive debt relief within 90 days from filing.
In many cases, your credit score will actually INCREASE after filing bankruptcy because the negative history goes away.
It is often the most inexpensive option with all-in costs ranging between $1000 - $3000.
You get legal protection against creditors, so you will not be sued.
Below is our estimate of how Chapter 7 compares to other debt consolidation and debt relief options.
Should I file for a Chapter 7 Bankruptcy if I qualify?
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. Feel free to take the Chapter 7 means test calculator to get started.