What is The Bankruptcy "Means Test?"

The bankruptcy Means Test is a financial assessment used in the United States to determine eligibility for filing Chapter 7 bankruptcy, which is a form of debt relief that allows individuals to discharge most of their unsecured debts. The test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005 to prevent individuals with higher incomes from filing for Chapter 7 bankruptcy if they are deemed capable of repaying some of their debts. Here’s a breakdown of the Means Test:

Purpose of the Means Test

The test is designed to evaluate whether an individual’s income is low enough to qualify for Chapter 7 bankruptcy.
If the test determines that the individual has sufficient disposable income to repay some debts, they may be required to file for Chapter 13 bankruptcy instead, which involves a repayment plan.
How the Means Test Works

The Means Test involves a two-step process:

(STEP 1) Median Income Comparison:

The debtor’s current monthly income (CMI) is compared to the median income for a household of the same size in their state.
Current Monthly Income (CMI): This is the average monthly income received by the debtor over the six months prior to filing for bankruptcy. It includes most sources of income (e.g., wages, salary, bonuses, business income, rental income, etc.) but excludes certain benefits like Social Security.

If the debtor’s CMI is below the state median income, they automatically pass the Means Test and can file for Chapter 7.
If the CMI is above the state median income, the debtor must proceed to the second step.

(STEP 2) Disposable Income Calculation:

This step involves a more detailed analysis of the debtor’s income and expenses to determine their disposable income.
Certain allowable expenses (based on IRS standards and actual expenses) are subtracted from the CMI. These include:

Living expenses (e.g., food, clothing, housing, utilities, transportation)

Secured debt payments (e.g., mortgage, car loans)

Priority debts (e.g., child support, alimony, certain taxes)

Other necessary expenses (e.g., health insurance, medical costs)

After subtracting these expenses, the remaining amount is the debtor’s disposable monthly income (DMI).
If the DMI is low enough (based on specific thresholds), the debtor may still qualify for Chapter 7. Otherwise, they are presumed to have the ability to repay some debts and may need to file for Chapter 13.

Key Points

• Median Income: The median income varies by state and household size. It is updated periodically and based on U.S. Census Bureau data.
• Presumption of Abuse: If the debtor fails the Means Test (i.e., their disposable income is too high), there is a "presumption of abuse," meaning the court assumes they are not eligible for Chapter 7. However, this presumption can sometimes be rebutted with evidence of special circumstances (e.g., recent job loss, medical emergencies).
• Special Circumstances: Debtors can argue for adjustments to their income or expenses if they have unique financial hardships, such as high medical costs or a recent reduction in income.
• Applicability: The Means Test applies primarily to individuals and married couples filing for bankruptcy. It does not apply to business bankruptcies or certain disabled veterans.

Formula for Disposable Income (Step 2)

Here’s a simplified representation of the disposable income calculation:
{Disposable Monthly Income (DMI)} = {Current Monthly Income (CMI)} -

If the DMI multiplied by 60 (representing 5 years) is:

• Less than $7,700: The debtor likely passes the Means Test.
• More than $12,850: The debtor likely fails the Means Test.
• Between $7,700 and $12,850: Further analysis is required to determine eligibility based on the percentage of unsecured debt that could be repaid.

Who Is Exempt from the Means Test?

Certain debtors are not required to take the Means Test, including:

• Disabled veterans whose debts were incurred primarily during active duty or homeland defense.
• Debtors whose debts are primarily non-consumer (business-related) debts.
• Members of the National Guard or Armed Forces Reserves who served in a combat zone.

Critical Examination of the Means Test

While the Means Test is intended to ensure fairness and prevent abuse of the bankruptcy system, it has faced criticism:
Proponents argue that it prevents high-income earners from exploiting Chapter 7 bankruptcy and ensures that those with the ability to repay debts do so through Chapter 13.

Critics contend that the test is overly rigid and fails to account for individual circumstances, such as regional cost-of-living differences or unexpected financial hardships. For example, the use of IRS expense standards may not reflect actual living costs in high-cost areas. Some also argue that the test disproportionately affects middle-class debtors who may earn above the median income but still struggle with overwhelming debt due to factors like medical emergencies or job loss.

Conclusion

The bankruptcy Means Test is a crucial step in determining eligibility for Chapter 7 bankruptcy in the U.S. It compares a debtor’s income to state median income levels and evaluates their disposable income after allowable expenses. While it aims to ensure fairness, its application can be complex and sometimes controversial, as it may not fully capture the nuances of an individual’s financial situation.

If you have specific questions about how the Means Test might apply to a particular situation, always contact a licensed and experienced attorney who focuses on bankruptcy Law.

Disclaimer: This article is not intended to be "legal advice." It is for general informational purposes only.