The Means Test

The means test was touted as a way to assure that consumers (the test only applies to consumer debt cases) who have the means to repay a significant portion of their debt are required to do so.

The means test has two stages.  The first stage compares the income of the household to the median income for households of the same size in the state where the debtors reside.  If the income is lower than the median income the debtors may file a Chapter 7 Bankruptcy and obtain a discharge of their debts.

If the income is higher than the median income, then a second calculation is done to determine the  “disposable income” which could be used to pay the unsecured creditors.  The “disposable income” is the gross income less allowable deductions.   The deductions are set by the IRS, and may very well be less than the actual usual expenses of the family.

If over five years the “disposable income” exceeds $10,000 or could pay at least 25% of the unsecured debt, then the debtors can not obtain a discharge in Chapter 7 and must file a Chapter 13 with a 5-year repayment plan to obtain debt relief in a bankruptcy. 

So if a debtor passes the means test, either the first stage or the second stage the debtors may file a Chapter 7 if they otherwise qualify.

The Nolo site has a decent online means test. Click here to take the means test.