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Means Test for Bankruptcy

Means Test for Bankruptcy

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Daniel Cohen
UpdatedJul 9, 2024
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    8 min read
Key Takeaways:
  • Examine what it takes to qualify for Chapter 7 bankruptcy.
  • Review the Census Bureau's chart for Median Family Income By Family Size.
  • Understand that the means test for bankruptcy was put in place to prevent abuse of the bankruptcy system.

What is a Means Test for Bankruptcy and How Does it Work?

Most people who are considering bankruptcy hope that they will qualify for a Chapter 7 bankruptcy.

A Chapter 7 bankruptcy, also called a liquidation bankruptcy, is a court-supervised procedure where a trustee appointed by the bankruptcy court takes control over the bankruptcy filer’s assets and sells them to repay the filer’s creditors. Not all of a filer’s assets are necessarily liquidated, as certain property owned by the filer is considered exempt and is free from any claims by creditors.

While bankruptcy law is a federal law and is filed in Federal Court, depending on the asset exemptions present in the law of the state where you live and any applicable federal laws, you may be able to keep some personal items and possibly real estate outside of the bankruptcy. Basically, this means a court appointed trustee sells everything they can use to pay off your creditors, except what is exempt. If a filer has no property aside from what is exempt, it is possible to entirely wipe out many kinds of debt in a Chapter 7 bankruptcy.

In 2005, the bankruptcy laws were changed, making it much harder to qualify for a Chapter 7 bankruptcy. One goal of the new law was to prevent abuse of the bankruptcy system, aiming to prevent people who can afford to repay their debts from successfully discharging them via bankruptcy. The new law instituted a new set of criteria for qualifying for a Chapter 7 bankruptcy.

Pre-Bankruptcy and Post-Bankruptcy Counseling

In most cases, if you plan to file for bankruptcy protection, you must first get credit counseling from a government-approved organization within 180 days before you file. You also must complete a debtor education course, in order to have your debts discharged. Credit counseling must take place before you file for bankruptcy; debtor education must take place after you file.

In general, you must file a certificate that states that you have completed credit counseling with an approved agency when you file for bankruptcy, and provide evidence of completion of debtor education after you file for bankruptcy and before your debts are discharged. Only credit counseling organizations and debtor education course providers that have been approved by the U.S. Trustee Program may issue these certificates. You can find an approved agency in your area at the U.S. Trustee Program Web site.

Median Income Test

Another step in the Chapter 7 qualifying process is to examine your household income and compare it to the median income for your state and for the number of people in your household. If your income is below the median level for your state, there is a good chance that you will qualify for bankruptcy, although your assets will be examined, too.

To calculate your income, the bankruptcy court reviews your household income for the 6 months preceding the month that you file. Your income for this 6-month period is compared to the median income table the government issues.

You can view the median income threshold for each state below, at the bottom of this page, where you will find a table that is furnished by the United States Census Bureau. Make sure to account for the size of your family, when you compare your income to the median for your state or US Territory or Commonwealth.

Also, keep in mind that the median income table may be updated at any time. The information on this page was updated in April, 2011, but could become out of date. You can always find the most current median income information at the U.S. Trustee Program Web site.

Means Test

One of the biggest changes was the requirement that you must pass a ‘means test’ in order to qualify for the liquidation bankruptcy, if your income is above the median income for your state. The bankruptcy means test determines whether your income is low enough for you to file Chapter 7 bankruptcy.

The means test is designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Instead, bankruptcy filers with a high income who fail the means test may choose to file a Chapter 13 bankruptcy, where it can be possible to repay a portion of their debts, but may not use Chapter 7 bankruptcy to wipe out their debts altogether.

Most individual debtors filing for bankruptcy relief are required to complete either Official Bankruptcy Form 22A or 22C (Statement of Current Monthly Income and calculations). Bankruptcy Form 22A is the form you complete if you are filing for Chapter 7 filers, for the purposes of means testing. Form 22C is the form you complete if you are filing for Chapter 13 bankruptcy.

Some of the information needed to complete these forms, such as your current monthly income, comes from your own personal records. Other information needed to complete the forms comes from the United States Census Bureau and the Internal Revenue Service (IRS). (While the IRS Web site states that their financial standards only apply to IRS tax matters, the U. S. Trustee Program Web site directs you to the IRS site for this information.

The court will review your household income and determine if you have enough money left over, after paying for only the expenses they recognize. The court will compare what you spend to the national and local standards that you find at the IRS link above, which lists allowable expenses for Food & Clothing, Housing and Utilities, and Transportation.

The expenses are based on the size of your household (Food & Clothing), the county you live in (for Housing & Utilities), and the region of the country you live in (for Transportation). If you exceed the allowable expense, the court does not have to recognize your full expense. For example, a family of two in Los Angeles County, California, is allowed to spend $2,101 per month on housing and utility costs. If you are a resident of LA County and your housing and utility costs exceed $2,101, the court may feel that you are spending too much on your housing and disqualify you from Chapter 7 bankruptcy.

According to the US Courts official Web site, you will not qualify for a Chapter 7 bankruptcy if your aggregate current monthly income over 5 years, less your "statutorily allowed expenses, is more than:

  1. $11,725, or
  2. 25% of your non-priority unsecured debt, as long as that amount is at least $7,025." You can only overcome this formula, if you can show a "special circumstances that justifies additional expenses or adjustments of your current monthly income."

In simpler terms, the court determines your disposable income, after reviewing your income and living expenses. You will not qualify for a Chapter 7 bankruptcy if:

  • You can pay at least $11,725 ($195.42 per month), for a five year period
  • You can pay at least $7,025 ( about $117 per month), over the five year period, and that is at least 25% of what you currently owe your unsecured creditors

If your disposable income is less than $7,025 (about $117 per month), over the five year period, then you are eligible to file for Chapter 7.

Don't Hide Anything from the Bankruptcy Court

Make sure to fill out any required forms accurately. It is important to disclose all income sources and assets. If you do not list a debt, it is possible the debt will not be discharged through your bankruptcy. The court can also deny your discharge petition if you destroy or hide property, falsify records, lie, or if you disobey a court order. Failure to do so can lead to dismissal of your bankruptcy case and even criminal prosecution.

Alternatives to Bankruptcy

Even if you pass the means test and are eligible for bankruptcy, filing for Chapter 7 may or may not be your best option. Because of the serious negative effects of bankruptcy, it is always wise to explore the available alternatives, such as negotiating out-of-court settlements with your creditors (either on your own or using the services of a reputable debt settlement firm) or using a debt counseling service. By weighing all your options, you are likelier to make the best choice.

Also, while it is not required to hire an attorney to file for bankruptcy, you should find an experienced attorney if you can afford one. If you can't afford one, call your county bar association and ask for the name of the organization in your area that provides no-cost legal services to people with low or no income. Make an appointment with that organization, and bring all of your necessary financial documents to your meeting. The attorney you meet with will advise you accordingly.

Census Bureau Median Family Income By Family Size

For Bankruptcy Cases Filed On and After March 15, 2011:

StateFamily Size
1 earner2 People3 People4 People *
District of Columbia$48,822$80,172$80,172$80,172
New Hampshire$51,460$63,534$82,465$89,990
New Jersey$59,060$70,680$85,573$101,106
New Mexico$37,274$51,855$52,303$53,709
New York$46,295$57,777$68,396$83,942
North Carolina$37,781$50,630$55,468$67,578
North Dakota$41,443$56,411$69,328$79,637
Rhode Island$46,136$58,511$72,184$88,593
South Carolina$37,055$50,500$52,738$63,074
South Dakota$35,582$53,443$58,794$68,016
West Virginia$39,750$42,607$51,350$60,280
* Add $7,500 for each individual in excess of 4
Commonwealth or U.S. TerritoryFamily Size
1 earner2 People3 People4 People *
Northern Mariana Islands$24,496$24,496$28,500$41,918
Puerto Rico$21,273$21,273$23,011$28,382
Virgin Islands$28,943$34,786$37,090$40,636
* Add $7,500 for each individual in excess of 4
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Debt statistics

Debt is used to buy a home, pay for bills, buy a car, or pay for a college education. According to the NY Federal Reserve total household debt as of Q1 2024 was $17.69 trillion. Auto loan debt was $1.62 trillion and credit card was $1.12 trillion.

A significant percentage of people in the US are struggling with monthly payments and about 26% of households in the United States have debt in collections. According to data gathered by from a sample of credit reports, the median debt in collections is $1,739. Credit card debt is prevalent and 3% have delinquent or derogatory card debt. The median debt in collections is $422.

Each state has its rate of delinquency and share of debts in collections. For example, in New Mexico credit card delinquency rate was 3%, and the median credit card debt was $400.

To maintain an excellent credit score it is vital to make timely payments. However, there are many circumstances that lead to late payments or debt in collections. The good news is that there are a lot of ways to deal with debt including debt consolidation and debt relief solutions.