What Is the Means Test in Bankruptcy?

Filing for bankruptcy can feel like stepping into a maze without a map. Among the many regulations and paperwork requirements, the Means Test stands out as one of the most complex—and crucial—steps in the process. Understanding this financial test is essential for anyone considering Chapter 7 bankruptcy.

At Whitten & Whitten, we’ve helped thousands of people navigate the means test; we don’t want to see it stand in your way. In this post, we’ll break down the Means Test and explain how it works so you can move forward confidently.

What Is the Bankruptcy Means Test?

The Means Test is a financial calculation used to determine whether you qualify for Chapter 7 bankruptcy, often referred to as “liquidation bankruptcy.” It primarily evaluates your income and expenses to assess your ability to repay debts.

The U.S. Congress introduced the Means Test in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Its goal was to prevent individuals with higher incomes from abusing the system by filing for Chapter 7 when they could afford to pay back at least part of their debts under a structured repayment plan.

Understanding and passing the Means Test is a critical first step for anyone seeking a fresh financial start through bankruptcy.

What the Means Test Entails

The Means Test consists of two parts: the first compares your average monthly income to the median household income in your state. The second part deducts certain expenses from your income to determine your disposable income.

Part 1: Income Comparison

To begin, you’ll need to gather information on all sources of income for the past six months. This includes wages, self-employment income, rental property profits, and any other regular payments you receive. You’ll then calculate the average monthly income based on this data.

Next, this amount is compared to the median household income in your state for a family of similar size. If your average monthly income falls below the median, you qualify for Chapter 7 bankruptcy and do not need to complete the second part of the Means Test. However, if your income exceeds the median, you must move on to Part 2.

Part 2: Deductions

The second part of the Means Test involves deducting specific expenses from your income to determine your disposable income. These deductions are standardized by the Internal Revenue Service (IRS) and include rent/mortgage payments, utilities, food, clothing, healthcare costs, and taxes.

If your disposable income is equal to or below a certain threshold set by state law, you pass the Means Test.

What Happens if You Fail?

Failing the Means Test doesn’t mean all hope is lost; it simply means you may not qualify for Chapter 7 bankruptcy. Instead, you may need to explore other debt-relief options.

Chapter 13 Bankruptcy

Under Chapter 13 bankruptcy, you can reorganize and repay debts through a manageable plan lasting 3–5 years. It’s designed for individuals with enough disposable income to repay a portion of their debts while still receiving legal protections.

Negotiating With Creditors

For some, direct negotiation with creditors to restructure or reduce debt is a viable alternative. This often works best with the guidance of a bankruptcy attorney who can advocate on your behalf.

The Role of an Attorney in Navigating the Means Test

While tools and online calculators exist for estimating Means Test eligibility, they often oversimplify a highly nuanced process. Subtle income or expense reporting errors could keep you from qualifying. Here’s where an experienced bankruptcy attorney makes a difference:

1. Accurate Calculations: Attorneys ensure that all income and expense figures comply with state and federal guidelines.
2. Experienced Knowledge of Exemptions: Understanding which expenses can be deducted and how can increase your odds of qualifying.
3. Special Circumstances: Establishing exceptions related to unique challenges increases flexibility in passing the Means Test.

Secure Your Financial Freedom Today

The Means Test is essential in determining whether Chapter 7 bankruptcy suits your financial needs. While the test can be complex, understanding its structure and calculations will help you make informed decisions about your future.

If you’re unsure whether you qualify or need guidance with the process, the team at Whitten & Whitten is here to help. With extensive experience in handling bankruptcy cases, we’ll ensure your paperwork is accurate and that you understand all available options. Take the first step toward debt relief today by contacting us for a free consultation.