What Is the Bankruptcy Means Test?
Every day, at 3:27 PM, your phone rings from the same number in Barstow, California. At 4:53 PM, a different call comes from St. Charles, Missouri. In between, numbers that look eerily similar to your cell phone number pop up on your phone at seemingly random times. The calls are so frequent that you have almost completely stopped answering your phone unless the number is one you recognize. You have considered changing your phone number entirely just to get rid of the interruptions.
And that doesn’t even begin to address the volume of bills and angry letters you get in the mail about your past-due debt.
Bankruptcy is certainly one solution out of this common situation. You may have even had friends or colleagues who have whispered to you about their own bankruptcy filings over a cup of coffee, giving you hope for a debt-free path forward. But before you rush to file, you need to know about the most intimidating part of the process: the Means Test.
In order to prevent alleged abuses of the bankruptcy system by high-income debtors who are living above their means, the Bankruptcy Code requires people seeking Chapter 7 relief (where debt is eliminated) to pass an eligibility test based on their income and expenses. If they fail, or do not wish to submit to this test, their only option is a Chapter 13 test where they develop a plan to pay back much of the debt, if not all of it.
What does this means test mean? The two-part test first asks whether your income is below the median for your area. Upsolve has an extremely in-depth article and map of median incomes across the country. For example, a family of one in Mississippi that makes less than $45,317 is automatically eligible for a Chapter 7 filing.in New Jersey, anyone making less than $71,917 is eligible. If your income is below this amount, congratulations: you automatically pass the test and can file a Chapter 7 bankruptcy.
If you make more than this amount, you may still be eligible but you will have to pass a more rigorous examination. The court will look at your income and your necessary monthly expenses such as rent, medical needs, and food. Anything left is considered disposable income, and if your disposable income is considered large enough to cover your debt, the court may force you to convert to a Chapter 13 filing where you reorganize and repay your debt over time, rather than a Chapter 7, where you eliminate it. Note that your necessary expenses will be compared to median amounts for your area – so a luxury penthouse rental for $8,000/month won’t take $8,000 off your income. The court will instead substitute a more “normal” rent amount when calculating your disposable income.
Obviously, if you are going through the work of filing bankruptcy and looking at Chapter 7, your goal is to eliminate the debt. And while Chapter 13 may provide some relief, it is not the relief you were looking for. That is why it is so important to consult with an experienced attorney when preparing your bankruptcy filing: experienced attorneys know what “reasonable” sounds like in your area when it comes to rent, expenses, and income. They can guide you on whether you have a shot at passing the means test before you file as well, perhaps saving you a lot of time and money on a bankruptcy filing that may have been doomed from the start.
If you are considering filing, and are not confident that you will pass the means test, you can schedule a consultation with an attorney in our network to discuss your concerns and to strategize on your best path forward.