What is the Chapter 7 Means Test?

Before filing Chapter 7 bankruptcy, you must first qualify under the Chapter 7 Means Test - A test that is used to determine if you are eligible for this form of bankruptcy.

The Chapter 7 Means Test is a simple tool that helps assess your debts, income and assets to ensure that filing Chapter 7 bankruptcy is only used by people who truly need it.

Means Test + Median Income Requirements

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A major component of the Chapter 7 Means Test is the ability to compare your income to the median income level in Michigan.

If your income is less than the median income in Michigan...
> then you likely qualify to file Chapter 7  
    bankruptcy.

If your income is more than the median income in Michigan...
> you may still qualify for Chapter 7, but the 
    means test will require you to compare your 
    expenses and disposable income against the 
    bankruptcy court’s allowable expenses.

"If the court finds you do not have enough money left over each month to repay a significant part of your debt, you may still be eligible to file Chapter 7. Otherwise, you may need to file bankruptcy under Chapter 13."

Steps of the Chapter 7 Means Test

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STEP 1 > YOUR MONTHLY INCOME

The first part of the Chapter 7 Means Test compares your monthly income to the median income for Michigan based on the size of your household.

If your monthly income is at or below the median income level, the means test is over. 
> In this situation, there is typically no presumption of abuse and you are eligible to file a Chapter 7 bankruptcy petition.

How Does the Court Determine My Income?
To calculate your applicable annual income, the court looks at the previous six months and multiplies that amount by two (x2).

> Those who have recently seen a reduction of income or job loss may consider waiting a few months to file, as this could significantly lower their annual income under the means test.

"The median income may vary significantly according to your specific geographic location and the size of your family. Based on the latest data, the U.S. Trustee’s Office updates the median income levels two times per year."

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STEP 2 > DEDUCT ALLOWABLE EXPENSES

Even if your income is greater than the state median, you may still be able to file under Chapter 7 if you qualify under the second part of the test - calculating your disposable income.

> This second step deducts certain allowable expenses, such as housing costs and utilities, from your monthly income based on IRS standards.

The remaining amount left over after these allowable expenses is your "disposable" monthly income. This number is then multiplied by 60 to determine how much disposable monthly income you’re projected to have over the next five years.

If the five-year total is less than $6,000...
> then you have passed the means test and you may file bankruptcy under Chapter 7.

If the five year total is more than $10,000...
> then there is a presumption of abuse, and you will likely need to file a Chapter 13 repayment plan, though you will be given the chance to include additional necessary expenses to reduce your monthly income.

"However, if your total disposable income for the five-year period falls between $6,000 and $10,000, then you must make one more calculation."

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STEP 3 > QUALIFYING

For this step, you will take your projected disposable income over the next five years - that number you calculated that falls between $6,000 and $10,000 - and compare it to the total amount of your non-priority unsecured debts.

• If your disposable income is less than 25% of the total of those debts, then there is no presumption of abuse, and you therefore qualify to file under Chapter 7.
  

> Just as before, you will have the opportunity to show special circumstances that justify the inclusion of additional expenses.

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SUMMARY > THE BANKRUPTCY MEANS TEST

When everything is said and done, the Chapter 7 Means Test works like this:

1 | Compare your monthly income to the median income in Michigan:

If your income is at or below the state median... 
> the presumption for abuse does not arise and you “pass” the means test.

If your income is more than the state median...
> you'll need to calculate your disposable income for the next five years.

2 | Calculate your disposable income over the upcoming five years:

A |

B |

C |

If that number is below $6000, the presumption for abuse does not arise and you “pass” the 
means test.
If that number is above $10,000, the presumption for abuse does arise, and you can file under Chapter 7 only with a showing of special circumstances.
If that number is between $6000 and $10,000, calculate 25% of your outstanding unsecured, 
non-priority debts.

3 | Multiply your outstanding unsecured, non-priority debts by .25:

If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts...
> you “pass” the means test and can file under Chapter 7;

If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts...
> the presumption for abuse arises and you can file under Chapter 7 only with a showing of special circumstances.

"Regardless of whether you passed the Chapter 7 Means Test, you should know that your bankruptcy trustee can still throw your case out for abuse if he or she deems that your particular case warrants it.

A seasoned and experienced bankruptcy lawyer can give you more specific advice about what  circumstances might cause a trustee to challenge or dispute your bankruptcy case."