Means Testing in Chapter 7 or Chapter 13 Bankruptcy

What is Means Testing?

The means test was added to the bankruptcy code in October 2005 to create objective standards for determining which individuals qualify for filing for relief in Chapter 7 vs. Chapter 13 bankruptcy. It applies only to individuals and only those individuals who have primarily consumer debt.

The first step in Chapter 7 bankruptcy means test is simple. It compares your income to the median income in your state for families the same size as yours. If your income is lower than the median the debtor “passes the means test” and most likely will file a Chapter 7 bankruptcy. If the debtor’s income exceeds the median income, a further analysis is performed, looking at the debtor’s calculated ability to fund a Chapter 13 plan. The debtor’s disposable income is calculated by a mix of actual and standardized expenses to the debtor’s previous average income. If it is determined that the debtor can pay $10,950.00 in five years or as little as $182.50 a month to creditors, a presumption arises that a Chapter 7 filing is abusive and may not be appropriate, however, the presumption of abuse may be rebutted by the debtor. Your income, for means testing purposes, is your income for the six months prior to the filing of your bankruptcy. For means test purposes, it doesn’t necessarily matter what your income is now. What matters is your income for the proceeding six months. Income includes income from all sources with the exception of Social Security related programs. For example, income includes unemployment and employment income as well as pensions and passive income.

There are many unanswered questions about the application of the means test in various family configurations and income scenarios. Only court interpretation of these murky areas of the amendments will begin to map the actual effect of the means test and other aspects of the BACPA Amendments of 2005. And remember, Congress’s goal is to reserve Chapter 7 bankruptcy for those who really do not have the means to pay. However, it is also important to remember that most people who would have qualified for a Chapter 7 bankruptcy prior to the October 2005 Amendment, still do qualify for Chapter 7 bankruptcy relief.

Median Income for Pennsylvania and New Jersey Residents

Family Size PA Median Income NJ Median Income
1 $44,396 $59,812
2 $53,572 $71,744
3 $67,516 $85,764
4 $77,590 $102,894
5 $85,090 $110,394
6 $117,894 $117,894
For each additional dependent + $7,500 + $7,500

These income amounts are accurate as of 12/1/10 and are periodically changed based upon IRS and census data.