The Means Test for Bankruptcy

To keep high-income debtors from filing for Chapter 7 bankruptcy, there is a process called the means test for bankruptcy to determine whether you qualify to file under Chapter 7. High-income debtors must use Chapter 13 bankruptcy to pay off all or most of their creditors, whereas low-income debtors that pass the means test may use Chapter 7. The first part of the formula for the means test is simple.

The first step is to determine how your income relates to the average income for your household size in your state. If your income is below the median income for the state, then you may file for Chapter 7 bankruptcy. If your income is above the median, then you must move on to the next part of the test.

The next step can be more complex. You must subtract your monthly expenses from your monthly income in order to get your disposable income, and then determine whether you have enough disposable income to attempt to pay off your debts. If your disposable income is above a certain level, then you must file for Chapter 13; if it is below, you may use Chapter 7. Your allowable expenses and level of allowed disposable income varies depending on your location, so it is best to look online for a guide to see what the rules are in your state or region.

Although this seems like a lot of math, there are resources that can help you out. There are online calculators which will do the math for you based on your household size and location. All you will have to do is input some income and expense numbers and it will tell you whether you pass the means test.

Now you have determined whether you may file for Chapter 7 bankruptcy. Keep in mind that the means test is just a qualification test – just because you may qualify for Chapter 7 bankruptcy does not necessarily mean it is the best option for you, so you should consult other resources to determine your best choice. Still, the means test is a good starting place for determining the best type of bankruptcy filing for you.

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Graham Billings

Graham Billings is a senior at the University of North Carolina at Chapel Hill with a double major in Economics and Political Science. He plans to graduate in December of 2009 and then attend law school in the fall of 2010. He is a member of the Economics Club at Carolina, which brings in speakers and hosts events in order to discuss current economic issues and help those who do not have a background in economics become more familiar with it. He is a National Merit Scholar and Dean’s List recipient. He is originally from Greensboro, North Carolina and attended the Early College at Guilford for high school, taking classes at Guilford College. In addition to economics, his academic interests include the legal and political system. He headed the only student-run, high school-level Honor Court in high school and participated in a national model Congress in San Francisco, run by Harvard students, and won awards of excellence for his work on the mock Supreme Court. Additionally, he tutors Carolina students in economics on a volunteer basis.

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