What Is the Means Test?
The means test is a calculation required by bankruptcy law. It determines whether a debtor has the financial "means" to repay debts. It plays different roles in Chapter 7 and Chapter 13.
The Means Test in Chapter 7
In Chapter 7, the means test determines whether a debtor is eligible to file at all.
Step 1: Compare income to the state median
The test starts by calculating the debtor's "current monthly income." This is average gross monthly income over the six months before filing. It includes wages, salary, business income, rental income, and most other income sources. Social Security benefits are excluded in most cases.
The debtor's current monthly income is then compared to the median income for a household of the debtor's size in the debtor's state. If the debtor's income is at or below the median, the debtor passes the means test automatically and may file Chapter 7.
Step 2: If income is above the median
If the debtor's income exceeds the state median, the test moves to a second step. The debtor calculates monthly disposable income. This is done by subtracting allowable expenses and deductions from current monthly income. Allowable expenses include:
IRS-standard living expenses (food, clothing, household supplies, personal care)
Actual mortgage or rent payments
Actual car loan or lease payments
Mandatory payroll deductions (taxes, Social Security, mandatory retirement contributions)
Secured debt payments
Priority debt payments (for example, recent taxes, child support, alimony)
Health insurance, child care, and certain other necessary expenses
The means test uses a mix of actual expenses and standardized amounts. These amounts are based on IRS collection guidelines.
Once monthly disposable income is calculated, it is multiplied by 60. If that total is:
Less than approximately $8,175 (this figure is adjusted periodically): The debtor passes the means test and may file Chapter 7.
More than approximately $13,650 (adjusted periodically): Abuse is presumed under the test. Chapter 7 may be denied. The debtor will likely need to file Chapter 13 instead.
Between these amounts: The result depends on whether the debtor's disposable income would pay at least 25% of unsecured debt. If yes, abuse is presumed. If no, the debtor may qualify for Chapter 7.
If the court finds abuse, the Chapter 7 case may be dismissed or converted to Chapter 13 with the debtor's consent.
The Means Test in Chapter 13
Chapter 13 does not use the means test to bar debtors from filing. Instead, the means test determines two key things:
1. Plan length: If the debtor's income is below the state median, the plan can last three years. If income is above the median, the plan must last five years. The debtor can pay off the plan early if creditors are paid in full.
2. Disposable income: The means test calculation of the debtor's disposable income helps determine how much must be paid to unsecured creditors each month. In Chapter 13, the debtor must devote all projected disposable income to plan payments.
Key Takeaways
Chapter 7: The means test can prevent a debtor from filing if income and disposable income are too high.
Chapter 13: The means test shapes the plan's length and payment obligations but does not block eligibility.
Income is calculated over six months: Current monthly income is the average of gross income for the six months before filing. A recent job loss or pay cut may lower the average and help a debtor pass the means test.
Expenses matter: Allowable deductions and expenses reduce disposable income. Accurate reporting is essential and should be completed with the assistance of a bankruptcy attorney.