Bankruptcy Means Test for Chapter 7

The means test for Chapter 7 bankruptcy was created by Congress and helps decide if you qualify for liquidation or straight bankruptcy.  Here is what it is, some answers to common bankruptcy means test questions, and a weird tip on passing the bankruptcy means test and its median income limits (ok, it’s not weird, but I think you’ll find it helpful).

Historically, there was no bankruptcy income limit

Before 2005, any income earner could, in theory, file Chapter 7 bankruptcy. There was a time in those days where a single person filing bankruptcy could earn $8,000 a month after taxes and still get a discharge. The credit card companies lobbied Congress to change the law and make it harder to qualify. In response, Congress passed a bankruptcy reform called BAPCPA in 2005. One of the new provisions was to add a means test so that the more someone earned, the harder it became to qualify for Chapter 7.

What is the Bankruptcy Means Test

The bankruptcy means test is a long form that asks how much money someone has earned recently. It starts by determining a) what your “current monthly income” is. Then, it compares that to b) a median income limit for their state, for a similar-sized household. If your income is less than the magic number, you pass the means test for Chapter 7.  Consequently, you can file bankruptcy that way.

Figuring Your Current Monthly Income

Once you’ve figured out which income limit number is the standard for your state, you now need to compare against it your current monthly income. And like most things in bankruptcy, this is not as straightforward as it seems.

What is Current Monthly Income on the Bankruptcy Means Test?

How do you calculate current monthly income? Let’s start by saying what it’s not.

Current Monthly Income is Not

Current monthly income is not your current income, as reflected from your most recent paystub. Now, that might make sense, but this is law, and bankruptcy law, to boot.

It’s also not what you put on your most recent tax return. While that is helpful information, and your bankruptcy attorney will want that for different reasons, the tax return actually has no place on the means test.

Current Monthly Income is

Put simply, the current monthly income is the average of all the income you’ve earned the past six months. Note the word “all” before income.  It’s not just the gross income from your paychecks; it also counts most government benefits, bonuses you got from work, commissions, overtime, tips, and all those other deposits from Zelle on your bank statements.

But I don’t get to keep my gross income before taxes

Notice that above I used the word “gross income” from your paycheck. You might think it’s not fair that they’re counting all the money you earned before Uncle Sam takes his cut with taxes and other payroll deductions. But that is the way Congress wrote the law, and the form.  “Your gross wages” are literally the first words used when it’s time to input numbers on the bankruptcy means test.  Don’t worry: there’s a place where we get to subtract taxes later if you earn “too much.”

Check out our ultimate
Chapter 7 bankruptcy guide

Your State’s Median Income

bankruptcy means test for chapter 7
A bankruptcy attorney can skillfully complete the bankruptcy means test for chapter 7.

The short answer is, the income limit for Chapter 7 is the median income for your state based on your household size. This is a number that changes from time to time, based on the overall economy.  For cases filed after May 1, 2021, the annual median income numbers are in a spreadsheet compiled by the Department of Justice Means Testing.  In looking at the California median income, the annual one-person household median income now exceeds $60,000. You can read the specific and updated California median income limits that should be in use at least until the end of 2021. Update: DOJ said these numbers will be in place until Spring 2022.

Miscellaneous Bankruptcy Means Test Factoids and FAQ

Does means test income count just me, or my spouse also?

This comes up all the time. A couple is married, but only one of them is filing bankruptcy.  This is where community property comes in. California Family Code Section 760 says that everything acquired by one spouse during the marriage is the property of both. Or put differently, both spouses’ paychecks, even though it has each name on it and maybe the other can’t spend it, is counted in the current monthly income of both spouses. This is regardless of which spouse files bankruptcy.

Now, it’s true that your spouse doesn’t have to file bankruptcy with you. But even if they aren’t, the chances are very strong that your spouse’s income will count also. And this counts not just your spouse’s pay, but presumably all income from any source, including businesses and that Amazon or Etsy storefront.

 

If I earn more than the California median income, does that mean I don’t qualify?

Let’s say you’ve gone back and looked at every single paystub for the last six complete months. You counted all the overtime. You calculated that bonus, and you’ve input that insurance check and those DraftKings winnings. You annualize the number and you’re over the California median income for your household size (or your own state). If you’re over the line, you could still qualify for Chapter 7 bankruptcy.

Just because you earn a smidge more than the median income limit for the means test doesn’t mean it’s game over. It just means that you need to do the second part of the bankruptcy means test. This is the part where you get to subtract some of your payroll deductions.  It’s a combination of a) actual things you pay; and b) ‘standard deductions’ you get to subtract (regardless of what you actually spend). For example, federal and state taxes get backed out; voluntary retirement doesn’t. What you actually spend on health insurance counts; a set amount for rent and clothes is given to you regardless of what you actually spend.

Explaining all the dozens of line-items of deductions is beyond the scope of this document. However, at the end of ten pages or so of taking things away from your gross pay and current monthly income, we reach disposable income. It’s possible that your current monthly income is over the state median income limit, but that your disposable income is low enough to still qualify for Chapter 7 bankruptcy.

Learn about the median income limits
used to qualify for Chapter 7 bankruptcy

So Do I Qualify for Chapter 7

It’s common to wonder “Do I qualify for Chapter 7” since not everyone does. It’s really a two-step process. Firstly, do you earn under the median income limit for your state and household size. Secondly, if you don’t, is there enough to pull you back under. And thirdly, can you actually afford to repay some of your debt. This may all sound simple, but as you’ll see, there’s a lot of gray to consider. Just like it’s not really a two-step process.

Note: If you’ve researched bankruptcy information, and the types of bankruptcies, you may have read that Chapter 7 bankruptcy is a faster, cheaper option to discharge debt.  It’s not always better.

Will I qualify for Chapter 7 if I earn more than the median?

It’s common to wonder “Do I qualify for Chapter 7” even if you earn more than the median. Don’t panic, even if you earn more than the median income for your state and household size. It’s possible that you may still qualify for Chapter 7. The rest of the bankruptcy Means Test massive form requires a series of numbers filled in for expenses. In some cases, these monthly expense are what you truly spend. In others, it requires some standard expense number put out by the Internal Revenue Service. If you spend more than the IRS allowance, that doesn’t count.  However, if done properly by a skilled bankruptcy attorney, it can still be possible to be eligible for Chapter 7 even if you make more than the median income.

Allowable expenses in the means test

It can be disappointing to learn that some real-life expenses don’t count in the bankruptcy means test. For example, there’s no box in which to put your fantasy football pool, or your season tickets to the Lakers (or opera). More realistically, we have no box for that money you send to your ex but it’s not court-ordered support.

There is a box for food and clothes, but you get what the government averages give you, and that’s all. If you spend more than that, you’ve got an uphill battle ahead to prove why that should be allowable.  An experienced bankruptcy lawyer will get to know you and your situation, and maybe think of a box that is a good fit for an expense that you may not have considered.

Household Size and the Means Test

Household size is a key component in the bankruptcy means test. It’s possible to pass the means test with a larger number, but not be under the income limit with a smaller household size.  How many to use for isn’t always clear. For example, if you live with roommates, do you count their income as “heads on beds” even though they live in your home but you can’t access their income? Or if you have 3 kids you help support (one adult away at college, another adult working part-time living at home, and another under 18 but your ex shares custody), is your household size 1, 2, 3 or 4? These are very fact-specific determinations; there is no set answer. Contact a bankruptcy attorney to guide you through the means test.

The One Weird Trick to Passing the Means Test

Here it is.  One weird trick to getting under the median income limit and passing the means test. And in a word, this is it: timing. In general, maybe you can’t control your pay, you can’t control your income, you can’t turn down overtime. But unless a creditor is about to garnish or foreclose or some other terrible thing, what you can control is when you file bankruptcy. And that has consequences… one of which could be positive if your goal is to get under the limit and file Chapter 7.

An Online Bankruptcy Means Test Calculator Says I Don’t Qualify

This lawyer will want to complete the means test

First of all, don’t buy into those online bankruptcy means test calculators. I won’t, even if you swear it’s accurate. They’re not always spot-on, and every penny counts. Even if the means test calculator is using the correct California median income limits (or wherever), chances are that you didn’t input your FICA deductions, state income tax, (and others) for each paycheck. In the real world, that’s what we have to do. It never hurts to double-check. In fact, I’ll insist upon it.

So, I will want to manually input all the numbers myself to be certain if you. There are lots of nuances a skilled bankruptcy lawyer can discern. It’s quite possible that after an experienced professional completes the means test you may pass where you thought you didn’t.

Still, maybe after we plug in all the numbers, you don’t qualify for Chapter 7. No matter how skillfully done, it just might be the truth that you don’t meet the eligibility for the bankruptcy means test for Chapter 7 right now.

Timing is everything.

The good news is that someone who isn’t eligible for Chapter 7 now might qualify in the future. Heck, it’s possible you didn’t pass this month, but may next month.  There is a strategy in timing, and one element we control is when we choose to file bankruptcy.

To repeat something you’ve heard a lot by now, if we file your bankruptcy case today, we’re using the last six months.  But guess what: filing bankruptcy next month will be a different six months than the current hand we’ve been dealt. If we file bankruptcy in seven months from now, that’s potentially an entirely different six months.

How does “When” Factor into the Bankruptcy Means Test?

One element of the Chapter 7 means test is which pay stubs to use for proof of income. The Bankruptcy Code defines “Current monthly income” in section 101(10A)(A) as all the income received in the six months before filing. If we wait to file your case now and file it later, that will be a different six months of income, and some of today’s “old” income will no longer count.

Warning: there’s a very real downside if you choose to wait. You’re not protected from your creditors until you file. That means they can continue to harass you, give you a lawsuit, garnish your wages, foreclose on your house, and make your life miserable while we wait for the ideal time to strike.  You really want to meet with a bankruptcy attorney as soon as possible. Contact me now and let’s chat.

What’s the worst that can happen if I file Chapter 7 anyway

If you don’t qualify, omit some of your income, or use the wrong household size, and file Chapter 7 bankruptcy anyway, the Department of Justice will send you a very official letter. It’ll state that in your case the presumption of abuse arises. Bankruptcy abuse is bad. It will then likely file a motion to dismiss the case, and you lose all that time and money. And out all that money, you’ll still need a bankruptcy.

I’m not eligible for Chapter 7, Can I Still File Bankruptcy

Not everyone is eligible for Chapter 7. However, even if you don’t pass the means test for Chapter 7, you still deserve debt relief. Consequently, there’s a bankruptcy option for you. You can file bankruptcy under Chapter 13.

Chapter 13 bankruptcy isn’t terrible: it’s government-operated debt consolidation. You make some payments on your debt, freeze interest so you’re not paying minimums forever, and are protected from lawsuits. You’ll definitely want an experienced bankruptcy lawyer, and guess what: I’ve done hundreds of these.

Contact us now and let me run your means test

Reach out to me now. I can complete the bankruptcy means test for Chapter 7. You don’t need to commit to a full bankruptcy. Let’s just see if with all my experience I can get you under the income limits to pass the means test and if you qualify. If you continue with us, we’ll subtract the means test fee from the bankruptcy cost. Call or email — no obligation — and let’s set it up right now.