What is the Means Test in Chapter 7 Bankruptcy?
The means test is criteria used by the bankruptcy court to ascertain whether a debtor is eligible to file Chapter 7 or 13. The test emerged in 2005 when bankruptcy laws were overhauled with the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).
Prior to BAPCPA, debtors filed Chapter 13 (as opposed to 7) if they owned homes and had equity they wished to protect and keep. Some Chapter 13 debtors had equity in other property, such as vehicles, they sought to retain, so they filed repayment plans. Chapter 13 filing motivations persist; however, BAPCPA mandates that many debtors must now file Chapter 13 in lieu of 7 without possessing equity in a home or other property.
The reason behind this compelled Chapter 13 filing is that the means test considers debtor's income, on average, for the half year before bankruptcy. That six-month average income is compared to the state's median income. To be eligible for Chapter 7, a debtor's six-month average income must fall below the state's median income. If a debtor's income falls above the median level, then debtor must navigate the remaining parts of the means test to ascertain whether Chapter 7 eligibility exists.
The means test further examines income less living expenses and multiplies that figure by 60 for the months of the maximum bankruptcy plan under Chapter 13. The figure for living expenses excludes debt payments for items contained within the bankruptcy. The bankruptcy court construes living expenses in terms of those captured in stringent tax schedules of the IRS and not what is incurred. The product of this formula signifies the debtor's available income for funding repayment of debts over five years.
The means test requires that if available income during that five-year period is at least $10,000, then debtor is only eligible for a Chapter 13. This translates to a requirement that if a debtor earns more than the state median income level and has at least $166.67 available monthly in income, then Chapter 7 is foreclosed, and Chapter 13 is the only alternative.
The Final Component of the Means Test
For those earning more than the state's median income level but don't net the $166.67 in income available for debt repayment each month, the final component of the means test kicks in. If a debtor's available monthly income is below $100, then the debtor remains eligible for Chapter 7. However, if the debtor's monthly available income falls between $100 and $166.66, then debtor's income is compared to total debts to arrive at a percentage. The benchmark percentage under the means test is 25 percent for the ratio of available income to debt total. When available income of the debtor exceeds 25 percent of debt total, then he or she is only eligible to file Chapter 13.