Simply put, the means test either qualifies you for a Chapter 7 bankruptcy or requires you to file a Chapter 13 bankruptcy based upon disposable income.  There may be other reasons to file a Chapter 13 bankruptcy, but we’ll leave those for another topic.

The means test was implemented with the bankruptcy reform laws of 2005, also known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  The idea was to close loopholes that allowed higher income households from filing Chapter 7 bankruptcy.  The means test became the tool for assessing whether an individual or couple would qualify for Chapter 7 bankruptcy or whether their filing of Chapter 7 bankruptcy would be considered a “presumption of abuse”.

The means takes the following items into consideration, specifically for the six calendar months prior to the month of filing bankruptcy:

Number of individuals in the household including dependants and non-dependants

Household income from all sources including wages and salary, pension and retirement, support from family members, support from others living in the household, child support, 401(k) and retirement withdrawals, self-employment, rental income, investments and basically any other source of income

Income taxes paid

Monthly payments for mortgages or rent

Monthly payments on vehicles

Monthly payments on furniture, appliances, jewelry, etc.

Average monthly child care expense including day care, pre-school, mothers-day-out, and babysitting

Average monthly expense for healthcare insurance, disability insurance, healthcare savings account and term life insurance

Average monthly out of pocket healthcare expenses including co-pays, co-insurance, deductibles, etc.  (This is in addition to what is paid for insurance.)

Average monthly charitable contributions

Monthly child support or alimony paid

Expense of administering a Chapter 13 bankruptcy

Other expenses including food, clothing, utilities and gasoline are taken into consideration, but they are based on either Internal Revenue Service or Census guidelines indexed on the household size or income.  In other words, your actual monthly expenses are not specifically taken into consideration but guidelines are used to factor in these household expenses.  In most cases, the guidelines are fair and often advantageous to you.  These are referred to as the guidelines expenses for purposes of this blog.

The means test for bankruptcy is a multi-level approach.

1. The first test is to compare your average household income for the six calendar months prior to filing to the median household income within your state. The median income factors in the number of people within your household.  If your actual household income is less than median household income with your state, you automatically qualify for Chapter 7 for purposes of the means test.  This is sometimes referred to as the Current Monthly Income or CMI test.  If your average household income or CMI is above the median for your state, you must go to the next test.
2. In the second test, your actual monthly expenses and the guideline expenses discussed previously are taken into consideration. These expenses are deducted from your average household income or CMI.  This results in your Disposable Monthly Income or DMI.  If your household DMI is less than $117.08, there is no presumption of abuse and you qualify for Chapter 7 bankruptcy.  If DMI is above $195.41, abuse is automatically assumed and you must file Chapter 13.  If DMI is between $117.08 and $195.41, you must go to the next test.
3. In the third test, your DMI is compared to your actual unsecured debt (credit cards, medical bills, personal loans, repossessions, etc.). If your DMI multiplied times 60 months (five years) allows you to pay 25% of your unsecured debts, then you must file a Chapter 13.  If there is not enough income to pay 25% of your unsecured debt, you will qualify for a Chapter 7.

It is difficult to simplify the means test.  If you use an online means test calculator, be careful, since they do not always take into consideration the complexities of the test.  In addition, passing the means test does not always insure that Chapter 7 bankruptcy is best for you.  You should seek legal advice for your specific situation.