Law office providing bankruptcy services to consumers, as well as
business formation services and contract drafting and litigation.
17401 Irvine Blvd., Ste A
Tustin, California
Bankruptcy Chapter 7 Means Test
How the Means Test Works:
The first step is to determine if a debtor’s current monthly income is less than the median income for a household of the same size in the state in which the debtor resides. If the debtors income is less, the debtor may file under chapter 7 and rest of the means test does not have to be completed.
If, however, the debtor’s income exceeds the state’s median income, then a determination is made to see if the debtor has enough income left over (called “disposable income”), after paying allowed monthly expenses to pay off at least a portion of the unsecured debts, such as credit card bills. If the debtor’s disposable income adds up to more than a certain amount, the means test is failed and the debtor can’t file under Chapter 7. An important aspect of the test is that the figures used by the court to calculate living expenses are NOT the debtor’s actual living expenses, but are instead amounts taken from the same schedules used by the IRS in the collection of taxes.
In this second step of the means test, the debtor’s income, less living expenses (excluding payments on the debts included in the bankruptcy), is multiplied by 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations. If the income available for debt repayment over that 5-year period is $10,000 or more, then Chapter 13 will be required. In other words, with anyone earning above the state median, and with at least $166.67 per month of available income, the presumption of abuse arises and chapter 7 will be denied.
If the debtor’s median income exceeds the state’s medium, but the debtor does not have at least $166.67 per month to pay toward your debts, then the final part of the means test is applied. If the disposable income is less than $100 per month, then Chapter 7 again becomes an option. If the available income is between $100 and $166.66, then it is measured against the debt as a percentage, with 25% being the benchmark. If the disposable income over five years exceeds 25% of the total debt, 7 the presumption of abuse arises and chapter 7 will be denied.
There are special circumstances that will rebut (or overcome) the presumption when the presumption arises and those circumstances are best evaluated by an attorney.
TIf you are considering filing for bankruptcy and don’t know if the means test will apply to you, please give us a call and schedule a free consultation. We’ll make the determination for you.
