What is the Bankruptcy Means Test?

The means test is the test that determines who is eligible for a Chapter 7 bankruptcy. Most people facing bankruptcy would rather file a Chapter 7 because it completely eliminates most debts and you are not required to make monthly payments. If you do not pass the means test, you will have to file a Chapter 13 case, which will require continuing monthly payments for three to five years.

The means test is designed to evaluate your income and debts to determine whether you are capable of repaying any of your debts. The means test has two parts:

  • Is your income higher than the median income for your area? and
  • Do you have enough disposable income left after paying for all of your normal living expense to fund a Chapter 13 plan?

The first part compares your monthly income to the average monthly income for a similarly-sized household in your area.  If your income is lower than the median income, then you pass the test, and you are eligible for Chapter 7.  Even if you are above the median income, you still may be eligible for a Chapter 7 bankruptcy if you pass the second test, that is if you do not have enough disposable income to fund a Chapter 13 plan.

The Business Debt Exception to the Means Test

If your debts are primarily business debts (meaning more than 50% of your total debt) the means test does not apply to you.  In this situation, you qualify for Chapter 7, despite whether you would have passed either part of the means test.  So what is a business debt?  A business debt is a debt taken out in connection with your business or in connection with some venture in which you expected or hoped to make a profit.  Therefore, loans for business related activities, debts owed to vendors, and business taxes are all business debts.

The Good Faith Requirement

Passing the means test under either part only creates a presumption that you qualify for a Chapter 7. In addition to the means test, there is a general requirement that your petition be made in good faith.   It is possible for the trustee to object that your petition was not in good faith and claim that you are not eligible for a Chapter 7.   However, a vast majority of people that pass the means test or use the business debt exception to the means test will get through a Chapter 7  with no problems.