What Exactly Is A “Means Test” ?

What Exactly Is A “Means Test” ?

If you’re a debtor considering bankruptcy, you’ve probably heard of the “means test.” The “means test” is simply that—a way to determine if you have the “means” (ability) to pay your debts. Debtors who take this test will have their income and expenses calculated to determine if they have any disposable income. If they don’t have enough disposable income to pay their debts, they can file Chapter 7 bankruptcy, but, if they do, they’ll need to file Chapter 13 bankruptcy. Let’s take a closer look at how the “means test” could affect your bankruptcy case.

Low-Income Debtors

If you earn less than the median income in your state, you may automatically pass the “means test.” The median income is the point where half the people earn less and half the people earn more. For example, if a state’s median income is $50,000 that means that half the people in that state earn less than $50,000 and the other half earn more. Anyone who earns less than the median income automatically passes the “means test” and will probably qualify to file Chapter 7 bankruptcy where they can wipe out many of their debts.

Taking the Test

When you take the “means test,” you’re permitted to deduct allowable living expenses from your gross income. This can include housing costs, your car note, utilities, food expenses, child care, health care etc. Your bankruptcy attorney will help you through this process to make sure that you’re deducting the correct expenses and that your test is accurate. Your disposable income is calculated using this information. If your disposable income is enough to pay some of your debts, then you can’t file Chapter 7 bankruptcy, but you can file Chapter 13 bankruptcy and repay most (or all) of your debts over three to five years.

It’s important to note that having high income does not automatically mean you need to file Chapter 13 bankruptcy, but it does mean that you’ll need to take the means test to determine if you’re eligible for Chapter 7 bankruptcy.