What Is the Means Test in Bankruptcy?

Chapter 7 bankruptcy is also known as “debt forgiveness,” and it’s the main form of bankruptcy that most people think of when they hear the term. However, not everyone qualifies for this form of bankruptcy, as it was created specifically for those who cannot afford to cover their debts within the agreed-upon timeframes. In order to qualify for Chapter 7, you will need to pass the “means test.”

The means test is best understood as a formula for checking your total income, which allows you to determine whether you meet state and federal guidelines for Chapter 7. Because it can become rather complicated to measure your household finances, it’s recommended that you seek out the services of a skilled bankruptcy lawyer before you file.

What Are the Main Components of the Means Test?

The Chapter 7 means test consists of two different forms, both of which would need to be filed with your bankruptcy paperwork. In step one, you will make a statement of your current income, and in step two you will be providing additional calculations to show that you pass the means test.

Step One of the Means Test

To create a statement of your annual income, you will need to document your exact monthly income and then multiply it by 12. Most people don’t realize that monthly income isn’t just about your paycheck: This figure also includes any revenue from investments or properties, as well as other checks and deposits that you have received throughout the year.

Here are some other sources of monthly income you may receive:

  • Child or spousal support payments
  • Investment income
  • Unemployment checks
  • Business income
  • Retirement and 401k payments
  • Social Security paychecks
  • Workers’ compensation pay
  • Inheritances

Once you have your annual income figure, you will need to compare that sum with the median income in your state, which will be entered on your forms. The Georgia median household income is different depending on how many members are in your household, with the median ranging from $40,631 for a 1-person household to $116,685 for a 10-person household. If your monthly income does not exceed the number for your household size, you will most likely pass the means test at this point.

Step Two of the Means Test

If you did not pass this first part of the means test, it’s still possible for you to qualify in Step Two. In this stage, you will gather exact individual expenses for the last six months, and categorize them as "disposable" or “allowable." Allowable expenses encompass crucial necessities such as rent, clothing, food, medical costs, and transportation – everything else you purchase will be classified as disposable income. Because each state has a different interpretation of disposable and allowable income items, it’s important to review this portion with a skilled attorney. If your disposable income turns out to be lower than the state median, then you may still qualify for Chapter 7.

After the Means Test: Moving Forward

Regardless of whether you qualify for Chapter 7 or not, you can still file for Chapter 13 bankruptcy. Although Chapter 13 does not wipe the slate entirely clean, it does allow you to follow a government-sanctioned re-payment plan for your debts, and may drastically reduce your overall costs to creditors. Either form of bankruptcy can set you free from creditor harassment, property repossession, worrying about bills, and foreclosure.

Have questions about which form of bankruptcy is right for you? Just give our skilled attorneys at Busch, Reed, Jones & Leeper, P.C. a call at (770) 629-0154 for a consultation.