Means Test

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The means test, which is the Chapter 7 means test, is a formula that uses in bankruptcy law to decide if the debtor is eligible for Chapter 7 bankruptcy. If the debtor fails the means test, the debtor can only apply for Chapter 13 bankruptcy. The purpose of the means test is to see that if the debtor is abusing the bankruptcy system by filing Chapter 7 bankruptcy cases even though they could afford to pay at least some of their debts. Therefore, the means test is mainly testing the ability of the debtor to pay the creditor(s).

The means test has two steps:

  1. Is the debtor’s current monthly income more than census bureau median income in that state?

Each year, the Census Bureau will update the median income of all states and territories in the United States. (See here for the 2019 data.) If the debtor’s monthly income of the past 6 months, not including the filing month, is lower than the median income in the state, the debtor has passed the means test automatically.

However, if the debtor has income higher than the median income, the debtor will have to go to step 2 of the means test.

  1. If reduce the current monthly income of the debtor by expenses, and multiply the difference of the monthly income and the monthly expense by 60 months, and this amount is:
    1. More than or equal to $12,850,000, the debtor falls automatically under Chapter 13 bankruptcy; Or
    2. More than 25% of the unsecured debt, the debtor falls automatically under Chapter 13 bankruptcy; Or
    3. Less than or equal to 25% of the unsecured debt, the debtor can choose either Chapter 7 or Chapter 13 bankruptcy; Or
    4. Less than or equal to $7,700,000, the debtor can choose either Chapter 7 or Chapter 13 bankruptcy.

To pass step 2 of the means test, the debtor would have to record the expenses, including food, clothing and other items, out of pocket health care costs, housing and utilities, and transportation. After deducting these basic expenses, some expense deductions can be increased if the filter can show that their actual, reasonable and necessary expenses.

[Last updated in July of 2020 by the Wex Definitions Team]