The means test in a Chapter 7 bankruptcy

May 21, 2013

The means test in a Chapter 7 bankruptcy

Contrary to what some might think, everyone is not entitled to file for bankruptcy protection. There are a number of factors that have to be considered before such a determination can be made. The means test is often used to help individuals figure out their bankruptcy eligibility, and it can also be used to help that person determine whether a Chapter 7 or Chapter 13 should be filed.

Eligibility for Chapter 7 protection

Under the U.S. Bankruptcy Code, in order for a person to be eligible for Chapter 7 bankruptcy protection, he or she will have to pass a two-part means test. The first part of the means test looks at an individual's average monthly income for the six months prior to filing and compares it with Illinois' median family income. If the person's income is less than or equal to the median, the person can file for Chapter 7, and the test ends there.

Income for purposes of the means test can include:
-Gross business and/or professional income
-Rental property income
-Child and/or spousal support payments
-Unemployment or workers' compensation
-Salary, wages, tips, commissions and bonuses
-Annuity and/or pension payments

Tax refunds, Temporary Assistance for Needy Families, Social Security Disability Insurance, Supplemental Security Income and Social Security retirement benefits are excluded from the income calculation.

The second part of the means test applies to those individuals who make more than Illinois' median income. Once all permitted expenses have been calculated and deducted, if it is determined that the individual's disposable income is sufficient to be able to pay part of his or her unsecured debt under a Chapter 13 repayment plan, the individual will not be eligible for Chapter 7.

All is not lost if an individual fails the means test

Individuals who do not pass the means test might still elect to file for Chapter 7 protection. In fact, an individual can choose to argue the existence of special circumstances that otherwise find them to be eligible for a Chapter 7, anyway. This is called refuting the assumption of abuse. Such circumstances can include a recent loss of work, a major medical condition or exceptionally high rent. The individual will have to provide adequate proof in order for the expense adjustment to be made to his or her income, and therefore, the presumption of abuse is refuted; if approved by the court, the individual will be allowed to continue with the Chapter 7.

If an individual's request for an expense adjustment is denied, however, he or she would be required to convert the case to a Chapter 13, which is a repayment plan allowing repayment of the debt owed over a three to five year period, sometimes at a discount.

One's median income level is the primary factor of the bankruptcy means test, so it is imperative that a potential Chapter 7 bankruptcy filer know the statutory amounts and the specifics of the test. This is where an attorney is very helpful and necessary to make sure that not only the means test and qualifying is done correctly, but to make sure you take all necessary, reasonable and applicable deductions on the means test. Individuals who have questions about the test or bankruptcy in general should seek advice from a skilled attorney who practices in the area of bankruptcy, as he or she will be able to provide guidance based on the specific situation.

Keep in mind that no two bankruptcies are alike and that each case is different. Consult with an attorney to help determine which Chapter, if any, will be right for you. Additionally, while the means test is a major factor in determining eligibility for bankruptcy, it is not the only factor.

Article provided by Trepeck Bane PC
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