Legal Definitions - Means Test

The Means Test is a specific formula used in U.S. bankruptcy law to determine if an individual is eligible to file for Chapter 7 bankruptcy. Chapter 7 bankruptcy allows for the discharge (elimination) of most unsecured debts without requiring a repayment plan. The primary purpose of the Means Test is to prevent individuals who have the financial ability to repay at least some of their debts from simply wiping them out through Chapter 7. Instead, it aims to guide such individuals toward Chapter 13 bankruptcy, which involves a structured repayment plan over three to five years.

The Means Test typically involves two main steps:

• Step 1: Income Comparison
  The first step compares your average monthly income over the past six months to the median income for a household of your size in your state. If your income is below this state median, you generally pass the Means Test automatically and are eligible to file for Chapter 7 bankruptcy.
• Step 2: Disposable Income Calculation
  If your income is above the state median, the test proceeds to a second step. Here, specific allowed living expenses (such as housing, food, transportation, healthcare, and certain other necessary costs) are deducted from your income. The remaining amount, if any, is considered your "disposable income." This disposable income is then evaluated against certain legal thresholds. If your disposable income is low enough, indicating you genuinely cannot afford to repay a significant portion of your debts, you may still qualify for Chapter 7. However, if your disposable income is substantial, the Means Test will likely determine that you should file for Chapter 13 bankruptcy, where you would use that disposable income to repay a portion of your debts.

Here are some examples illustrating how the Means Test applies:

• Example 1: Automatic Pass Due to Low Income

  Scenario: Elena is a single mother of two children. She recently lost her full-time job and is now working part-time, earning significantly less than the median income for a three-person household in her state. She has accumulated substantial credit card debt and medical bills.

  How it illustrates the Means Test: Because Elena's current monthly income, averaged over the past six months, falls below the median income for her household size in her state, she would automatically pass the first step of the Means Test. This makes her eligible to file for Chapter 7 bankruptcy, as the test recognizes that her financial situation genuinely prevents her from repaying her debts.

• Example 2: Pass After Expense Deduction Despite Higher Income

  Scenario: Mark is an architect who earns an income slightly above the median for his state. However, he has significant ongoing medical expenses for a chronic illness, high childcare costs for his two young children, and a reasonable mortgage payment for his family home.

  How it illustrates the Means Test: Mark's income is above the state median, so he would proceed to the second step of the Means Test. After deducting his substantial and necessary expenses (medical treatments, childcare, and housing costs), his remaining disposable income is very low. The Means Test would likely determine that, despite his higher gross income, his essential financial obligations prevent him from making meaningful payments on his unsecured debts, thus qualifying him for Chapter 7 bankruptcy.

• Example 3: Failure Leading to Chapter 13

  Scenario: Sarah is a successful marketing executive earning well above the median income for her state. She has accumulated a significant amount of credit card debt. She lives in a modest apartment, has no dependents, and her essential living expenses are relatively low.

  How it illustrates the Means Test: Sarah's income is above the state median, so she moves to the second step. When her allowed expenses are deducted from her income, she still has a substantial amount of disposable income each month. The Means Test would likely determine that she has the ability to repay a meaningful portion of her debts. Therefore, she would not qualify for Chapter 7 bankruptcy and would instead be directed to file for Chapter 13 bankruptcy, where she would use her disposable income to fund a repayment plan for her creditors.