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MEANS TEST is required for all Chapter 7 petitions

The MEANS Test isn’t so mean.

To be eligible for a Chapter 7 bankruptcy, a debtor’s household income must be insufficient to pay his or her debts. In order to determine whether a debtor can afford to pay any of his or her debts, Chapter 7 Bankruptcy law compares the debtor’s annual income to the annual median income based on family size of the state where the debtor lives. Provided that the debtor’s income is lower than his or her state’s median annual income for the same family size, and provided that the debtor’s actual monthly living expenses leave no disposable income with which to pay toward unsecured debts such as credit cards, medical bills, and judgments, then the debtor will generally qualify for a Chapter 7 bankruptcy discharge. Current state annual median income by family size information is regularly published by the U.S. Census Bureau.

f the debtor’s annual income is greater than his or her state’s median income for the same size family, then the debtor must pass a “means test” in order to qualify for a Chapter 7 bankruptcy discharge. The means test portion of a Chapter 7 Bankruptcy petition is contained in official form B22A. The means test takes into account the current monthly income of the debtor together with the state median income for the debtor’s state. The means test also compares the debtor’s income with IRS published “standards” for allowable living expenses on both a national and a local basis. The local living expense standards take into account such items as metropolitan housing costs and transportation expenses. The means test is aimed at determining whether, based on the debtor’s income and the IRS determined “allowable living expenses”, the debtor can afford to pay his or her unsecured debts. If the debtor has no more than $100 of “disposable income” after allowed expenses, then he or she will pass the means test and the debtor can still qualify for filing a Chapter 7 bankruptcy even if his or her annual income is above the median income of similar family sizes for his or her state. If the debtor’s monthly disposable income falls above the $166 monthly mark, the debtor cannot qualify for a Chapter 7 bankruptcy. If on the other hand, the debtor’s monthly disposable income falls between $100 and $166 per month, then his or her eligibility for filing Chapter 7 is then determined by whether the debtor could pay at least 25% of his or her unsecured debt (at $166 per month over five years or $6,000 in the aggregate) in five years. It is important to note that if the debtor’s debts are primarily “non-consumer” debt, arising, for example from expenses incurred in the operation of a business, then such a debtor is exempted from having to pass the means test. In that event, Chapter 7 eligibility reverts to the simpler analysis of comparing current monthly income with necessary living expenses, but without reference to the standards for allowable living expenses incorporated into the means test.