Doing A Deep Dive Into The Chapter 7 Means Test

Income figures heavily into the ability to file Chapter 7 bankruptcy. As the filer's income is compared to the state median, something called the means test allows filers to justify the need to file even with a higher income level. This is not just a routine part of the bankruptcy paperwork — it's a make-or-break deal. To find out more, read on.

What Is the Means Test?

The bankruptcy code underwent some changes in the last several years aimed at preventing wealthy people from shedding debt by filing bankruptcy. Each state has its own median income and the Chapter 7 filer's income is compared with that median figure. The test comes in two parts and you only need to worry about part two if your income is higher than your state of residency's median.

The Means Test: Part One

Income for the past few months is input using the form, and that figure is then compared to the state median income. Along with your income, the bankruptcy form also wants to know about your personal living situation, such as who else lives in the home with you. If they earn income in any way, that income has to also be listed. If your income is at or below the state median level, you are finished with the means test. If not, you must move on to part two of the means test.

The Means Test: Part Two

If you failed part one of the means test, don't worry. You might still be able to get the debt relief you need as long as you have enough expenses. Certain expenses can be deducted from your income and that might be enough to allow you to file. This form, however, is quite a bit more complex than part one due to several questions about taxes based on arcane IRS rules. Making a mistake on this form could cause you several problems when the form is reviewed by the bankruptcy trustee. Your case could be thrown out, and you would lose the large filing fee you paid. If you don't already have a bankruptcy lawyer to help you, having to fill out part two of the means test is a good indicator that you need one.

More About Means Expenses

For an idea of how you can use certain expenses to reduce your income for filing purposes, take this example. Some people with high incomes also have high common expenses for housing costs. If your mortgage, property taxes, homeowners insurance, etc. are higher than usual, you might be able to deduct some or all of those expenses from your income and qualify to file.

Don't take a chance of missing out on the debt relief you need. Speak to a bankruptcy lawyer about your debt situation today.