The Bankruptcy Means Test Explained

If you are considering filing for bankruptcy, you have probably seen references to the bankruptcy means test as you research your options. But what is the bankruptcy means test? And will you have to take it if you file for bankruptcy?

What is the Bankruptcy Means Test?

Put simply, the bankruptcy means test is the method the government uses to determine whether a debtor has the ability to pay some or all of his or her debts. It is the result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which aims to prevent people who can afford to make payments on their debts under Chapter 13 bankruptcy from erasing their debts with Chapter 7.

Prior to filing for Chapter 7 bankruptcy, you must take the bankruptcy means test. The test compares your income to the median household income level and calculates disposable income by deducting eligible expenses. If, according to the test, you have enough disposable monthly income, it is presumed you will have the means to make payments to your creditors over the next three to five years, and are thus ineligible for Chapter 7 bankruptcy.

Starting the Bankruptcy Means Test Process

As you might expect, the bankruptcy means testing process is complicated; it involves filling out up to three separate forms and performing calculations based on individual circumstances and government data. The first step is determining whether your income is higher or lower than the median income, using Bankruptcy Form 22A-1 (“Chapter 7 Statement of Your Current Monthly Income”) which, like all other bankruptcy forms, is available on the United States Courts website.

Part 1 of Form 22A-1 requires you to list all sources of income that you received in the last six months as well as your spouse’s income. Income includes all wages, tips, bonuses, commissions, maintenance, child support, business profits, investment returns, retirement payments and income from any other source.

Part 2 compares your annual income with the median income, a figure determined by U.S. Census statistics. The median income level is typically updated twice a year and is based on the state of residence and the number of people living in a household. The median income for a family of four in New York, for example, is $88,156 for cases filed on or after November 1, 2014. The current median income information can be found at the Means Testing Information link on the U.S. Trustee website.

If your income is below the median income level, you qualify for Chapter 7 bankruptcy; if it is higher, you will move onto the next step: Bankruptcy Form 22A-1 Supp. (“Statement of Exemption from Presumption of Abuse”). Filers whose debts are not related primarily to household expenses and certain disabled veterans, reservists and National Guard Members are considered exempt.

Completing the Bankruptcy Means Test

The final step, if you are ineligible for an exemption, is to complete the actual means test, Bankruptcy Form 22A-2 (“Chapter 7 Means Test Calculation”). Part 1 of Form 22A-2 asks for the monthly income calculated on Form 22A-1. If applicable, that amount is then adjusted by subtracting any spousal income that does not go toward household expenses.

On Part 2 of Form 22A-2, you will calculate other eligible income deductions. These include expenses that the government considers necessary, such as housing, health care, childcare, education, food and clothing costs. The allowable expenses for things like food, clothing and health care are based on IRS National Standards, while IRS Local Standards determine acceptable housing and transportation costs. This accounts for regional differences in the cost of living.

Part 3 of Form 22A-2 determines whether there is a presumption of abuse, that is, whether you have enough disposable income to afford debt payments through Chapter 13 bankruptcy over the next three to five years. Finally, in Part 4, you may list other special circumstances that warrant additional deductions from your income. If you do not pass the bankruptcy means test, you do not qualify for Chapter 7 bankruptcy, although you may still be able to file for Chapter 13.

Before you make that decision, though, consider discussing your case with an experienced bankruptcy attorney. He or she will advise you on your options, and, given the complexity of the means test process, may even find missed deductions or other errors that might allow you to qualify for Chapter 7 bankruptcy.