Financial troubles can test your patience, your resilience, and even your sanity. Filing for Chapter 7 bankruptcy can put an end to all those tests, but you will have to take one more test if you want to file. It’s called the means test.
The means test is an essential step to filing Chapter 7 bankruptcy, but it can be intimidating for many people who would benefit from Chapter 7. We’re here to help. The team at A Bankruptcy Law Firm, LLC, has put together this guide to the Chapter 7 means test to help you not only understand this process, but get through it with as little stress as possible.
Read on to learn more. And to get help with the means test or any aspect of your bankruptcy case, don’t hesitate to reach out to our friendly and helpful team.
Personal Bankruptcy Statistics
Before we get too deep into the means test, it’s helpful to understand why this process may be worth going through when Chapter 13 bankruptcy doesn’t require it.
According to national statistics, 7 out of every 10 people filing for personal bankruptcy choose Chapter 7 liquidation over Chapter 13 reorganization. In a one-year period ending March 31, 2012, there were 958,757 Chapter 7 filings, compared to 396,175 Chapter 13 filings.
The reasons are fairly clear: A Chapter 7 discharge is possible within three to six months, while virtually all Chapter 13 cases require a five-year reorganization plan. In addition, Chapter 7 filers often do not lose any property because of state and federal exemptions.
On top of that, it’s possible that you may not actually be eligible for Chapter 13 bankruptcy, meaning your alternative option might have to include the Chapter 7 means test. That’s because Chapter 13 doesn’t have an income limit, but if you don’t make enough to be able to reasonably repay your creditors, you may not be allowed to file Chapter 13.
Chapter 7 Income Limit
Unless you are trying to protect property from foreclosure, chances are you will want a Chapter 7 bankruptcy. But what if your household income is relatively high? Since the 2005 overhaul of the bankruptcy code, Chapter 7 filers must meet an income threshold in order to qualify. If you earn less than the median income in the state, considering the number of people in your family, you are free to seek Chapter 7 bankruptcy protection. For a family of four in Illinois, for example, the median income as of July 2021 was $107,226.
What Is the Means Test?
However, it’s important to understand that a household income above the median in the state doesn’t necessarily mean a Chapter 7 is out of reach. Instead, there is a complicated formula that an experienced bankruptcy lawyer can help you navigate called the “means test.”
The idea behind the means test, introduced with the 2005 changes to the federal bankruptcy law, is to ensure that debtors who can afford to pay at least some money to creditors choose a Chapter 13 filing. The ultimate goal of the complex mathematical formula is to determine if the debtor has enough disposable income, after bills are paid, to disburse to creditors.
Your Income and the Means Test
As you have probably gathered by now, your income is going to be the key factor in the Chapter 7 means test. However, this is not a simple calculation. You can’t simply plug in your salary and find out whether you have “passed” the means test. There’s a lot more at play here, including the time frame for your calculations, deductions, your household size, and more.
Time Frame for Income Calculations
There has been some criticism of the means test over the years because of its complexity and the uniqueness of the calculation. For example, the average income for the calculation isn’t based on what a debtor currently earns. Instead, the means test requires that the debtor determine the average of the last six months of income.
Sometimes, this six-month time frame can be complicated because of changes in your job or employment status. For instance, if you had a high-paying job for five out of the last six months but recently became unemployed, an experienced attorney can help you factor that change into your means test calculations.
Sources of Income
When you calculate your income for the means test, you will need to include sources of income beyond your base salary. Here are some examples of sources of income you will need to include in your calculations:
- Your salary
- Any part-time or freelance income
- Retirement income
- Alimony and child support
- Unemployment income
Expenses to Include in Your Calculation
Also, the expenses calculated for the test do not match the debtor’s current expenses. Instead, expenses are calculated based on both national and local standards, and not a debtor’s actual expenses. For example, for the expense categories of food, housekeeping supplies, apparel and services, personal care products and services and miscellaneous, there is a national figure to use, which is updated regularly. Only in some expense categories, such as mortgage and car payments, can a debtor include their actual payments in the means test calculation.
Means Test Income and Household Size
The size of your household will have a huge impact on your ability to pass the means test. That’s because the number of people in your household determines the income limit for the means test. The more people you have in your household, the higher that income limit will be.
For example, in Missouri, the 2021 Chapter 7 income limit for a single-person household is $50,521. But if your household includes four people, the limit is $89,418. Keep in mind that if your income is below the income limit, you are automatically eligible to file Chapter 7, meaning you have passed the means test.
If your household size situation is straightforward, the income limit should be fairly simple to calculate. However, in more complex situations that involve dependents not living in the home and similar issues, you may need to speak with your bankruptcy lawyer or trustee to see how the court in which you will file calculates household size.
Determining Your Eligibility for Chapter 7 Bankruptcy
Once the income and expenses are calculated, the amount left over, if any, will decide if a debtor has enough disposable income to qualify for a Chapter 13 filing. If the anticipated disposable income for a five-year period exceeds $10,000, that triggers a presumption that the debtor can afford to make payments to creditors and should file under Chapter 13.
If a debtor’s disposable income is below $6,000 for the five-year period, they likely will qualify for Chapter 7 bankruptcy. If a debtor’s disposable income falls between $6,000 and $10,000, that triggers — you guessed it — another calculation.
This formula takes a look at the amount of disposable income compared to the level of unsecured debt. If the debtor’s disposable income, projected for a five-year period, is more than 25 percent of the total unsecured debt, the debtor will likely be denied a Chapter 7 filing. If the percentage is less than 25 percent, the debtor will most likely survive the means test and be allowed to continue with a Chapter 7 filing.
What Happens if I Pass the Means Test?
If you pass the means test, good news — you can continue on with the Chapter 7 bankruptcy process. That is not to say, however, that the work is over. Although it is generally a shorter process than Chapter 13, the Chapter 7 process can take months and is complicated. A trusted Chapter 7 lawyer can help you keep the process moving smoothly.
What Happens if I Fail the Means Test?
If you fail the means test, don’t despair. You still may have the option of filing for Chapter 13 bankruptcy. Additionally, if your income or financial situation changes, you can redo the means test calculations to see if you pass. Because the means test is simply a calculation you do, you can “retake” it as often as you like. And when you pass it, you’re eligible to file Chapter 7 bankruptcy.
Chapter 7 Means Test: The Forms You’ll Need
The forms involved in the Chapter 7 means test function like worksheets that help you do your calculations accurately. You will need to fill out and file these forms as part of your bankruptcy.
Here are the forms you will need:
Form 122A-1. This form is called the “Chapter 7 Statement of Your Current Monthly Income.” This document simply helps you determine whether your income is below the median income of your state. If it is below the median, you have passed the means test. That means the other two forms in this list will not apply to you.
- Form 122A-2. This form, titled the “Chapter 7 Means Test Calculation,” is the one you fill out if your income is higher than the state median. You will use this form to deduct allowable expenses and see how much income you have left over. This will help determine whether you might qualify for Chapter 7 or Chapter 13.
- Form 122A-1Supp. The “Statement of Exemption from Presumption of Abuse Under § 707(b)(2)” helps you determine whether you are actually exempt from taking the means test. For instance, some members of the military may not have to take the means test.
Chapter 7 Means Test FAQ
Like most aspects of bankruptcy, the Chapter 7 means test can bring up a lot of questions for filers. Because it is our goal to help people who are considering bankruptcy for financial relief, we have put together this means test FAQ to address some of the questions you might have. Read on for answers, or simply give our firm a call.
Do I have to include my spouse’s income if I’m filing bankruptcy without my spouse?
If you share a household with your spouse, you will likely have to include your spouse’s income in your Chapter 7 means test calculations. This can complicate your situation because it can push your household income above the median income for your state.
However, you can deduct part of your spouse’s income from your calculations if that income doesn’t go toward household expenses. The amount and types of income you can deduct can vary by jurisdiction, so speak with your trustee or attorney to get specifics.
What is the income cutoff for Chapter 7 in Missouri?
The income cutoff for Chapter 7 in Missouri changes routinely, based on federal data. However, in 2021, if you make less than the following figures, you likely qualify for Chapter 7 bankruptcy:
- One-person household: $50,521
- Two-person household: $65,680
- Three-person household: $75,500
- Four-person household: $89,418
If you have additional household members, add $9,000 to the four-person limit for each household member.
What is the income cutoff for Chapter 7 in Illinois?
The income limits for Chapter 7 bankruptcy in Illinois in 2021 are as follows:
- One-person household: $57,983
- Two-person household: $76,602
- Three-person household: $91,581
- Four-person household: $107,226
Remember to add $9,000 to the four-person income limit if your household is larger than four members.
Can I include income tax expenses in means test calculations?
Your income taxes are an expense you can include in your calculations for the means test. However, be sure you are including them correctly. For example, if you simply deduct the amount you pay toward income taxes out of your salary each month, you may not have an accurate figure. That’s because your tax refund — or lack thereof — will adjust the actual amount you are paying in income taxes.
Do I get a second chance if I fail the means test?
Absolutely. First, if you have a higher income than the median for your state, you get a second chance to pass the means test through the Chapter 7 means test calculation (Form 122A-2). Even if your income is higher than the median, you still can qualify for Chapter 7 if you don’t have enough money left after qualifying expenses to pay on a Chapter 13 repayment plan.
Failing the more complex means test calculation isn’t even the end of the chances you get. You can recalculate your means test income and deductions any time to see if your financial situation has changed enough to allow you to qualify for Chapter 7 bankruptcy.
Are online Chapter 7 means test calculators accurate?
If you Google “Chapter 7 means test calculator,” you will get dozens of webpages with calculators that claim to do the hard work of the means test for you. It’s difficult to say whether any of these tests are accurate, but keep in mind that many nuances can affect your means test calculations. A bankruptcy attorney can help you understand whether your calculations are accurate.
Help with the Chapter 7 Means Test and Beyond
The truth is that the Chapter 7 means test can be confusing for those who want to file bankruptcy. Even if you’re good at math, it’s easy to forget or misunderstand part of the calculation. We’re here to help.
At A Bankruptcy Law Firm, LLC, we have helped countless filers in Missouri and Illinois get through the means test and continue with their bankruptcies to ultimately achieve financial relief. We want to help you, too. To schedule a free initial bankruptcy calculation, call (800) 7-BENSON or contact us online.
Important Disclaimer: The information discussed above and throughout this website should not be relied upon to make any decisions without first speaking to a bankruptcy attorney. There are many intricate rules of law governing bankruptcy with many exceptions to the general rules that could change the advice given by an attorney based on the differing facts in each person’s special set of circumstances. THEREFORE, it is important to discuss any information contained in this website with one of our attorneys before taking any action or refraining from taking any action.