The Chapter 7 Means Test

When the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) went into effect, it prevented just anyone from qualifying for Chapter 7 bankruptcy. It created a maximum income threshold, otherwise known as the “means test,” which consumers must pass in order to file under Chapter 7. Not everyone passes the means test, and many errors can be made. You always want the help of an Indiana Chapter 7 bankruptcy attorney if you are considering bankruptcy.

How the Means Test Works

The means test aims to disqualify people who earn enough income that the law assumes they should be able to pay their debts. In short, if your household income is too high, you will not be able to file a Chapter 7 bankruptcy case. 

The means test considers all sources of income you receive and uses the average monthly income for the past six months. This can include regular wages, rental income, bonuses, commissions, benefits, and more. 

The test then measures your gross income against the median income for your specific state of residence and household size, as reported by the Department of Justice (DOJ). Some states have median incomes as low as $44,765 for single people in Mississippi or as high as $171,779 for a four-person household in the District of Columbia.

Starting in November 2020, the median income for Indiana was reported as:

• One-person households = $51,689
• Two-person households = $65,577
• Three-person households = $77,161
• Four-person households = $90,654

If your gross income is less than the applicable amount, you pass the means test, and you can file a Chapter 7 bankruptcy case. However, if your gross income is higher than the median income, you do not automatically fail the test, and all hope of a Chapter 7 case is not lost. 

An experienced Chapter 7 attorney knows how to determine your disposable income, which you might be able to use to pass the means test. Your lawyer will deduct qualified expenses from your gross income to determine your disposable income. Some expenses must be based on living standards for your area, while others can be your actual expense amounts. 

Some expenses might include:

• Mandatory paycheck deductions
• Tax obligations
• Insurance premiums
• Mortgage or auto loans
• Court-ordered payments
• Healthcare costs
• Childcare costs
• Required education costs of a disabled child
• Expenses from caring for an older, ill, or disabled adult in your household

You do not want to risk overlooking any possible expenses that you can deduct from your gross income to help you pass the means test. If your income minus qualified expenses is lower than the reported median income, you will pass. If your is still higher, you will need to explore other options for debt relief, such as Chapter 13 bankruptcy. 

Let an Experienced Chapter 7 Bankruptcy Lawyer Help

If you are wondering whether you qualify for Chapter 7 bankruptcy, you should not wait to discuss the matter with the legal team of Schmidt Whitten & Whitten. We can advise you regarding the means test and the bankruptcy process, so please contact us today.