Means Test


     The means test is a financial analysis of the debtor's income and expenses to establish whether the debtor has the "means," or sufficient income, to pay for debts of the debtor outside of bankruptcy. "Passing" the means test results from a determination that the debtor does not make "too much" money to qualify for filing a Chapter 7 case.

     There are actually two means tests that the debtor must pass to qualify for Chapter 7. The more widely known test looks back at the six months preceding the month of filing of the petition. This is a "backward looking" means test.

     However, in the second test, if the debtor's current or projected (as opposed to past) income exceeds the debtor's current expenses, then the case may also be dismissed under bankruptcy law. Since this test looks to current or projected income and expenses, it is a "forward looking" means test.

     The backward looking means test starts with the median income for the same household size as the debtor in the state where the case is to be filed. In California, the median income levels as of 4/1/2021 are (they are updated regularly):


          Household Size     Median Income (gross)

                     1                         $62,938

                     2                        $83,435

                     3                        $92,735

                     4                        $106,530


               additional               add $9,000


     For other states, see the Median Family Income data provided on the web site of the U.S. Department of Justice.

     Many people have the misconception that if their income is over the applicable median level, that they do not qualify for Chapter 7. In reality, this is only the first "step" of the backward looking means test.

     If a debtor's gross income is over median, then the analysis moves to step two, which is a complicated process of deducting certain actual and IRS standard allowable expenses of the debtor. If the expenses are sufficient to offset the income, then the debtor would also qualify for Chapter 7.

     If the debtor still does not qualify, they may try step three. This involves listing additional expenses and reasons why the court should let the Chapter 7 filing proceed, despite having income that does not fall within the guidelines. Given the intent of Congress to limit bankruptcy abuse, as expressed with the 2005 amendments to the bankruptcy code, courts are hesitant to approve a case under this third step.

    The forward looking means test is less complicated, in that the current or projected income and expenses are compared, using guidelines that are less stringent than with the backward looking means test. So long as the debtor shows little or no excess income over expenses, and no excess reasonably anticipated within the next year, as of the filing the petition, the filing should be approved.

     It is important to utilize the services of an attorney that has a detailed understanding of how these tests operate and how to fully complete the relevant schedules and forms of the petition, so that the court does not reject the bankruptcy filing. If that were to occur, the debtor would either have to take the much more expensive route of filing under Chapter 13, or their creditors would be free to obtain judgments, garnish wages, and place liens on the debtor's property.

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