Understanding Chapter 7 Means Test
If you are considering filing for bankruptcy, you may have questions about the Chapter 7 means test. Unfortunately, many people do not understand the means test and incorrectly assume that they are ineligible for a Chapter 7 bankruptcy. It’s important to understand your rights before you file — and we can help.
What Is the Chapter 7 Means Test?
You can choose from two types of personal bankruptcy in the United States: Chapter 7 and Chapter 13. Chapter 13 bankruptcy involves paying your debts under a payment plan over time (and allows you to keep your home or car). Under Chapter 7 bankruptcy, most of your property is sold and your debts are discharged. However, you are only eligible for Chapter 7 bankruptcy if you meet its means test.
Under the means test, if your current monthly income (CMI) and disposable income exceed certain limits, you cannot file for Chapter 7 bankruptcy. (However, you may still be eligible for a Chapter 13 payment plan.)
However, the Chapter 7 means test calculation is very complicated. It frequently involves a detailed accounting of your income and expenses. Since your financial freedom is at stake, you should consider hiring a bankruptcy lawyer to help you with your means test calculations.
Does the Means Test Apply in My Bankruptcy Case?
The means test is not applied in all bankruptcy cases. First, if your household’s CMI is under Massachusetts’ median household income, the government will presume you are eligible for a Chapter 7 bankruptcy. Your CMI is your household’s average monthly income for the past six months. (You must include all sources of income from all members of your household.) To calculate your annual average household income, multiply your CMI by 12.
Massachusetts bases its median household income on census data and other information. As of May 2017, the state’s median household income levels are:
- One person household: $61,102
- Two person household: $76,414
- Three person household: $93,755, and
- Four person household: $113,651.
For each additional person in your household, add $8,400 to calculate Massachusetts’ median household income. However, these numbers change over time. A bankruptcy lawyer can advise you of the most up-to-date income values.
Additionally, you may be exempt from the Chapter 7 means test if you are a disabled veteran who incurred most of your debt during active duty or while performing homeland defense activities or most of your debt is business-related.
How Do I Calculate Disposable Income?
If you are not exempt from the Chapter 7 means test, you must calculate your disposable income. Your disposable income is your CMI after certain monthly expenses are subtracted. These expenses include the cost of housing, food, clothing, medical treatment, transportation, childcare, and home heating. Depending on your situation, other expenses can also be deducted (such as charitable expenses or some forms of life insurance).
If your disposable income exceeds certain thresholds, the government assumes you have enough disposable income to pay off some your unsecured debt. In other words, if you have too much disposable income, you fail the means test and can only file for Chapter 13 bankruptcy.
However, do not assume that you will fail the means test because you have a high income. An experienced lawyer may find additional expense deductions and special circumstances that will help you qualify.
Speak with a Bankruptcy Lawyer About the Chapter 7 Means Test
Due to its complexities, we do not encourage clients to apply the Chapter 7 means tests without the help of a lawyer. The Law Office of Eric Kornblum has helped clients discharge their debts for over 20 years. We work with our clients to rebuild their finances and live debt free. Contact us for a confidential evaluation.