Chapter 7 Bankruptcy Overview

The "Means Test" to Be Eligible for Chapter 7

The bankruptcy Means Test is an objective standard used to determine whether one is attempting to file for Chapter 7 bankruptcy in an abusive manner.  Under the old bankruptcy law, there were no set guidelines to determine whether a debtor was using the bankruptcy law in an abusive way and, as such, each court made its own separate determination on the issue. But in 2005, Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act to counteract that problem and standardize the abuse criteria. Now, filers must submit to the Means Test to determine, at least initially, whether they are presumptively determined to be filing for Chapter 7 bankruptcy in an abusive manner.

The Means Test is a two-step income and expense analysis that can be somewhat complicated to calculate.

The Means Test: Step 1

The first part of the means test compares your average monthly income (for the 6 months prior to filing for bankruptcy) with New York State's median family income. If your income is less than or equal to the state median, a presumption is made that you are not abusively filing for Chapter 7 protection.  Even if you pass this median income test, be aware that a bankruptcy trustee may later determine that you have enough income after paying allowable expenses to repay your creditors in a Chapter 13 repayment plan.  If the bankruptcy court agrees, it will force you convert your Chapter 7 bankruptcy to a Chapter 13 bankruptcy or have your case dismissed.

The income calculation includes:

  • Wages, salary, tips, bonuses, overtime, and commissions
  • Gross income from a business, profession, or a farm
  • Interest, dividends, and royalties
  • Rental and  real property income
  • Regular child support or spousal support
  • Unemployment compensation
  • Pension and retirement income
  • Workers' compensation
  • Annuity payments
  • State disability insurance

The income calculation excludes:

  • tax refunds
  • Social Security retirement benefits
  • Social Security Disability Insurance
  • Supplemental Security Income; and,
  • Temporary Assistance for Needy Families
The Means Test: Step 2

If you make more than the New York State median income, then the second part of the Means Test will determine whether you are acting in a presumptively abusive manner. If, after deducting all allowed expenses, your disposable income is enough to pay a certain portion of unsecured debt in a Chapter 13 repayment plan, then a presumption of abuse arises for your Chapter 7 case.

Special Circumstances If You Fail the Means Test

If you do not pass the bankruptcy Means Test you may choose to file for Chapter 7 anyway. In all likelihood, a motion will be made to dismiss the case or convert it to a Chapter 13 bankruptcy based upon the presumption of abuse. You can defend the motion by establishing the presence of "special circumstances," such as recent unemployment, unusually high rent, or a serious medical condition.

To demonstrate the special circumstance, you must provide documentation for the requested expense or adjustment to your income and explain the necessity of the adjustment or expense. If the bankruptcy court allows the expense or adjustment, you can overcome the presumption of abuse and be allowed to proceed under Chapter 7.

File for Chapter 13 Bankruptcy If You Fail the Means Test

If you "fail" the means test, you may instead want to choose to file for Chapter 13 bankruptcy.

Debtors Eligible to Bypass the Means Test

The Means Test does not apply to disabled veterans that incurred debt while on active duty or while serving in homeland defense activities. This exclusion applies as long as the veteran's disability rating is at least 30 percent and more than half of the debt was acquired during active military duty or during service for homeland defense. Despite income and expenses, the veteran may file for Chapter 7.

If a filer's debts came mostly from operating a business, the bankruptcy means test is inapplicable and the debtor may file for bankruptcy under Chapter 7.

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