Not everyone can get the debt-clearing benefits of a Chapter 7 bankruptcy. Before you can file to have your debts discharged you must pass the Chapter 7 bankruptcy means test. This test evaluates your financial position to determine if you qualify for the debt forgiveness built into a Chapter 7 bankruptcy, or if you will need to look elsewhere for bankruptcy relief.
The Chapter 7 bankruptcy means test is a simple concept, but it can become rather complex in practice. It is a pass/fail test that indicates whether a person should file a Chapter 7 bankruptcy case. The bankruptcy means test measures your income and eligible expenses to see whether you pass below the bar of Chapter 7 eligibility. It is designed to keep high-wage earners from writing off debts they could otherwise pay, given time.
In simple terms, the bankruptcy means test measures whether your disposable monthly income is less than the median income for a household your size in your state. In other words, if you make less per month than half the other similar households in your state make, you will likely pass the Chapter 7 means test. According to the U.S. Census Bureau, in 2019 the Texas median household income was $61,874, or $5,156 per month. However, the number your family must measure against could be higher or lower, depending on how many people live in your household.
What happens if your family earns more than $5,000 per month? Will you automatically fail the Chapter 7 means test? No. You are allowed to deduct eligible expenses from your gross income. Some expense deductions are set according to national standards established by the IRS. These include:
You may also deduct some payments made to secured and priority creditors -- including your mortgage, car loan, non-dischargeable tax debts -- and ongoing domestic support obligations.
In addition, the means test will reduce your disposable income based on the administrative expenses that would apply under a Chapter 13 bankruptcy. Essentially, this step measures whether your creditors would receive more money if you filed for bankruptcy under Chapter 7, or Chapter 13. If after all the calculations are done, you are unable to pay at least 25% of your unsecured debts over five years, you will have passed the means test and are eligible to file a Chapter 7 bankruptcy.
Sometimes the numbers don’t add up in your favor. If you live in a high-rent area (including some neighborhoods near Houston), have exceptional medical expenses, or have a long and expensive commute, your actual expenses may be justifiably higher than the national standards. In these cases, you may be able to file a petition for a Chapter 7 bankruptcy even if you don’t pass the means test. However, you and your Texas bankruptcy attorney will have to prove that those expenses were actual, reasonable, and necessary.
Just because you didn’t meet the Chapter 7 means test doesn’t mean you can’t get bankruptcy relief. If you make too much money to file a Chapter 7 bankruptcy, you likely qualify for a Chapter 13 payment plan. A Chapter 13 bankruptcy may take longer than a Chapter 7, but it also allows you to keep your more valuable assets. In fact, many people prefer Chapter 13.
That’s why it is important to discuss your entire financial situation, including your assets and your debts, with a skilled bankruptcy attorney before deciding whether to file. If you simply put your income into a free online means test calculator, you could miss out on options that will put an end to creditor calls and help you get out of debt. I’m Attorney Patrick T. Williams, and I have been guiding Houston-area debtors through the steps of bankruptcy for over 20 years. Please call me or fill out an online consultation form to get started.