What is a Chapter 7 Means Test?
The Determination of the Ability to Pay Debts or Not
The United States Congress enacted sweeping reforms in bankruptcy law in 2005. Among the many changes enacted was a requirement that a person must complete a Chapter 7 Statement of Monthly Income and Means Test prior to filing a petition for chapter 7 bankruptcy. In short, the potential bankruptcy debtor must show that their income is such that repayment of all or a significant portion of their debts is not feasible, and that the Chapter 7 Petition is not an abuse of the bankruptcy code. For complete details and legal advice speak with a bankruptcy attorney.
Debtor Income Compared to Median Income
The test measures the potential debtor’s total income against the the median income for the same household size in the Debtor’s state. If the total income is below the median income than the presumption of abuse does not arise and the Debtor can file a Chapter 7 Petition. If the total income is above the median income than the test continues to measure the potential debtor’s expenses. This gets a little tricky. The means test does not allow for all expenses to be included. Some of the expenses are calculated using the standard expenses formulated by the Internal Revenue Service for the household size, and geographic location. Some expenses like payroll deductions can be used, within certain limits. Also, if a potential debtor intends to keep (reaffirm) their home then the mortgage payments may also be included, as well as any other secured asset payments, as long as the debtor intends to reaffirm the debt.
Determination of Disposable Income May Require Chapter 13
At this point the test measures the total income less reportable expenses over a period of sixty months to determine if there remains a significant disposable income over 60 months. If so, the the presumption of bankruptcy abuse arises and the debtor can not file a Chapter 7, but could possibly file a Chapter 13 with a 60 month plan to repay a significant portion of the debt, up to the disposable income amount. If a significant disposable income is not remaining then the debtor may file Chapter 7.
The Chapter 7 means test is very complicated and, so you should speak to am experienced bankruptcy attorney about the Chapter 7 means test and the presumption of bankruptcy abuse.