Bankruptcy law changed dramatically in 2005 with the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act. Until October 17 of that year, bankruptcy court judges decided on their own how much income was too much to qualify for Chapter 7; it was a matter of opinion. The new law changed all that. It prevents high-earning consumers from eliminating their debts without contributing some of their income to their creditors by making all Chapter 7 filers take a means test first to qualify.
Determining Your Income
The first step in the means test equation -- and perhaps the most important one -- is determining how much income you have. You can’t just take last week’s earnings and multiply by 52 to arrive at your annual income. Bankruptcy law uses your average income over the last six months, and this can be tricky. If you were earning well in January, February and March, but you then lost your job in April and decided to file for bankruptcy in June, those first three months of the year can push your average income way above what it actually is.
Not all income counts toward the means test, however. If you’re retired, you don’t have to include Social Security income. Sources of income must also be regular, not hit and miss. If your family helps you out financially when they can, this isn’t regular income; a time may come when their budget won’t allow it. If you took a loan against your retirement plan to try to stave off bankruptcy, this isn’t regular income either. Regular income includes wages, salary, interest, dividends, rents, royalties and regular retirement income, as well as unemployment, disability and workers’ compensation benefits.
Your State’s Median Income
After you’ve determined your average income, you must compare it to the median income in your state based on the size of your family. The median income would be higher for a family of four than it is for a single individual, and it may be more in one state than another. If your income is equal to or less than the median, you automatically pass the means test and you’re eligible for Chapter 7.
Your Living Expenses
If your income is more than the median income in your state for a family of your size, you’re not necessarily disqualified. This just means you must proceed to the next part of the means test rather than being automatically waved through. The next part is more complicated, but some websites, such as Legal Consumer, offer online calculators to help you.
The second part of the means test involves subtracting certain living expenses from your gross income to determine how much money you have left over each month after paying them. This determines how much you could give to your creditors if you filed for Chapter 13 instead. You can deduct your mortgage, utilities, car payment, tax obligations, child support and alimony dollar for dollar, but deductions for other transportation costs, food and clothing are based on what a family of your size normally spends. If groceries and dining out usually cost you $1,000 a month but Internal Revenue Service data -- which these figures are based on -- indicate that most families in your area spend only $600, you’re limited to $600, not what you actually spent.
You may be able to subtract a little more from your income if you’re married but your spouse isn’t filing for bankruptcy with you. You’re required to include your spouse’s income for the means test, as it’s money coming into your household to help you pay your other deductible expenses. But you can apply a marital adjustment deduction to subtract amounts she spends for her own personal use, such as credit cards in her sole name, her personal entertainment expenses, her auto loan and insurance, cell phone plan and student loan payments.
If you claim the marital adjustment deduction, be careful with your calculations and make sure you can document the expenses. You can’t claim the same expenses twice -- once as yours and again as hers -- such as if you have one auto insurance policy that covers both your cars. Figure out exactly how much of the premium is attributable to her income, then claim the rest as your own expense.
The Bottom Line
If you have less than $100 a month left over for creditors after paying expenses, you’ve passed the means test. If your extra income amounts to more than $166.66 per month, you’ve failed the means test. You can’t file for Chapter 7, but you can file for Chapter 13. If your disposable income falls somewhere between these two figures, you need to determine whether it's enough to pay your unsecured creditors, such as credit card companies, at least 25 percent of what you owe them over five years. If the answer is yes, you must file for Chapter 13.
- Nolo: The Bankruptcy Means Test -- Are You Eligible for Chapter 7 Bankruptcy?
- Harborstone Law Group: High-Income Chapter 7 Bankruptcy -- Crossing the Threshold
- Legal Consumer: Bankruptcy Means Test Calculator
- FindLaw: Who Can File for Chapter 7 Bankruptcy?
- Nolo: The Marital Adjustment Deduction on the Means Test
- Emerson & Douglas: Bankruptcy
- United States Department of Justice: Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (PDF)
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.