The means test is used to determine if a debtor qualifies for Chapter 7 bankruptcy by comparing the debtor’s monthly income and expenses. It is intended to prevent debtors with disposable income from abusively filing Chapter 7. Debtors who ‘fail’ the means test can still file bankruptcy under a different chapter — typically Chapter 13.
Reduced to a basic level, the means test is a two step process. The first step compares the debtor’s gross monthly income to the median income by household size in the state where the debtor meets the residency requirement to file bankruptcy. Currently, for Arizona residents, the median incomes by household size:
- Household Size of One: $47,360
- Household Size of Two: $60,761
- Household Size of Three: $62,013
- Household Size of Four: $74,317
If the debtor’s gross income is less than the median income corresponding to his or her household size, the debtor qualifies for Chapter 7 bankruptcy. No further means testing is required.
If the debtor’s income exceeds the median, the debtor still may qualify, but only if the debtor’s allowable expenses leave the debtor without sufficient disposable income to repay creditors through a Chapter 13 bankruptcy. Allowable expenses vary regionally, so debtors should consult directly with an experienced bankruptcy attorney to discuss applicability and, more generally, Chapter 7 eligibility.
Debtors who pass the means test do not automatically qualify for Chapter 7 bankruptcy. The bankruptcy court still compares your actual expenses, not just the allowable expenses, to your income. This part of the means test can be cruel because it can favor higher income filings with large mortgages, automobile payments, unpaid taxes, or certain types of family support. That is because these expenses may be deductible from gross monthly income before the other ‘necessary’ living expenses are even factored.
The good news is that most debtors who are interested in filing Chapter 7 bankruptcy, usually can pass the means test. If you would like to discuss this or any other issue related to bankruptcy, please contact our attorneys for a free consultation.