The bankruptcy “means test” determines whether your income is under the designated level for you to file Chapter 7 bankruptcy. It’s designed to keep filers with higher incomes from filing Chapter 7 bankruptcy. Whereas high income earners who fail the means test have the option of filing a Chapter 13 bankruptcy to repay a portion of their debts in lieu of a Chapter 7 Discharge of mostly all of your debts. Bear in mind however that Chapter 7 means test doesn’t mean that you must be totally broke in order to use Chapter 7 bankruptcy. Even if you earn significantly high monthly income that exceeds the income limits, if you have qualified expenses, such as a high mortgage payment, you may still pass.
The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can’t pay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy.
Only those with primarily consumer debts (more than 50% of their total debts must be consumer debts), not business debts, need to take the means test. The means test is two tiered; First tier is to determine if your current monthly income is less than the median income for a household of your size in your state. If you pass you’re done. You do not need to complete the rest of the means test. For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called “disposable income”), after paying your “allowed” monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills and medical expenses). If your monthly disposable income exceeds certain amounts, you fail the means test and cannot file for Chapter 7 bankruptcy and may need to consider Chapter 13 bankruptcy.