When filing for bankruptcy under the Chapter 7 or Chapter 13, the first and foremost step is to find out whether you are eligible for that particular Chapter. Means Test is designed to evaluate your income and compare it with your expenses and the total amount of debt you are currently unable to repay.
Means Test is mandatory for filing under any Chapter as it is a fundament of all calculations in the petition. When making calculations, it’s important to avoid attempts to hide you additional sources of income, as it is considered a sort of bankruptcy fraud and prosecuted to the fullest extent of the law.
Two steps of Means Test calculation
The Means Test Calculation is done in two steps.
Step 1. The first step implies the Comparison of Median Income. Median Income is the average monthly income of families that consist of the same number of members. It’s important that median income of families may vary significantly depending on the area and district of living. Thus, the comparison goes only with the median income of families living in your exact area. You can compare it yourself by using a State Median Incomes table.
If you are going to file under Chapter 7, it’s important that your income is lower than the median Income. Though, even if your median income is higher than average, it doesn’t mean your bankruptcy is impossible. Now it’s time for the step 2.
Step 2. Calculating the amount of unsecured debt and your Disposable Income
According to IRS guidelines, a person has a certain pool of necessary monthly expenses that have to be subtracted from the income this particular person receives. All types of income are included: the salary from the full-time job, all part-time payments, and a self-employment income.
After expenses are subtracted (Insurance payments, rent, food and utility bills, medical care, transportation, etc.), the pure disposable income is left. Then, your disposable income is calculated for the period of five years and divided on 60 months. If it turns out your monthly disposable income is less than $195 (the amount may differ from state to state) – you qualify for the Chapter 7.
What if you fail the Means Test?
Failing the Means Test doesn’t always mean you do not qualify for the liquidation bankruptcy. There is still a chance that you will succeed in filing under Chapter 7. If you are filing with the help of a professional bankruptcy attorney, he will find all possible ways to make your petition work (or, otherwise n non-professional lawyer will try to convince you there is no choice but only filing under Chapter 13).
But if you file “pro se” (on your own), you will find this paragraph helpful.
The first option – you can wait a bit longer to file under Chapter 7 later, when the amount of debts are higher and your disposable income is lowered enough to pass the Test.
The second option is to get a new loan of Insurance just prior to filing for bankruptcy. That is how the sum of disposable income lowers due to new necessary payments for the new loan. Make sure you get this loan not right before sending the petition, as the court will consider it as the attempt to artificially fit for Chapter 7.
The third option may cost you some money. If you can afford hiring really experienced bankruptcy attorney who knows how to reevaluate you Means Test results to lessen you disposable income – try it and it will eventually pay off.
The Flip Side
On the other hand, you may not qualify for Chapter 7 even if you have passed the Means Test successfully.
First of all, if according to calculation your disposable income is between $117 and the ceiling of $195, it seems like you have passed the test for Chapter 7. Still, if the court decides you are capable of paying at least about 25% of your unsecured debt (like a credit card), you will be required to switch from Chapter 7 to Chapter 13 (reorganization bankruptcy).
Why is that? It’s because not only the income of previous 60 months counts but also they forecast your income and expenses for the next 60 months. So, if, based on your documents, you are able to repay the fraction of your debt even if your disposable income is going to be less than 195 – you will not qualify for the straight bankruptcy.
The Bankruptcy Forms and the Means Test Forms
For all the forms visit the official U.S. bankruptcy court website where all forms are available and free to download.
The first form is the Form 122A-1. It is purposed for calculation of your median income and comparing it with the median income of families who have the same number of members as yours.
The second form is the Form 122A-2. You will need this form if according to the first form your median income is higher than required for qualifying for Chapter 7. This 122A-2 Form determines your disposable income after subtracting all necessary monthly payments.
And, finally, the third form is Form 122A-1Supp, which is designed for individuals of certain professions, such as military, firefighter, and others.