Understanding the Chapter 7 bankruptcy “means test”

Understanding the Chapter 7 bankruptcy “means test”

On Behalf of | Mar 1, 2021 | Uncategorized |

When residents of Central Florida consider bankruptcy, they usually ask if the process will discharge all of their debts. This question gets the potential debtor a bit ahead of schedule. Before answering the question about the effect of bankruptcy, the debtor must answer a set of questions, called the “means test,” which will determine if the individual is eligible to file a petition under Chapter 7 of the Bankruptcy Code.

Why the means test?

When Congress amended the Bankruptcy Code, it determined that too many wealthy debtors were abusing Chapter 7 by discharging debts that they could afford to pay. In order to stop this perceived abuse, Congress amended the code to require that no debtor could file a petition under Chapter 7 unless the person’s financial condition justified the discharge of all or a significant portion of the person’s debts. Hence, the means test was enacted to require all Chapter 7 filers to demonstrate that they lacked any assets that could be used to pay their debts.

What is the “means test”?

The means test first provides that any person whose debts are not primarily consumer debts is exempt from the means test. Other persons, such as disabled veterans are exempt from the means test.

For filers who are not exempt from the means test, they must demonstrate that their average monthly income over the last six calendar months is less than the Florida average median income. One the monthly income is determined, the person multiplies the result by 12 and compares the result with the applicable qualifying annual income. For example, the qualifying income for 2020 for a family of 4 is $63,196. Any four-member family whose income is less than that figure has already passed the means test and can file a petition under Chapter 7 to discharge all of their debts.

If a person fails the initial portion of the means test, he or she can still provide additional information. If the final result of making allowed subtractions and mandated additions puts a person’s monthly income over the limit, the person has failed the means test and must proceed under Chapter 13.

All potential Chapter 7 debtors should understand that merely passing means test does not automatically mean that a person should file under Chapter 7. The advice of an experienced bankruptcy attorney can be very helpful both in completing the disclosures required by the means test and in making the all-important decision of whether to file under Chapter 13 or look for other avenues to financial relief.