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Understanding the Chapter 7 “Means Test”

Via Department of JusticeGovernments often require individuals or families to demonstrate eligibility for a particular program or benefit, in what is known as a “means test.” The U.S. government has used means tests for programs like Medicaid and food and housing assistance. A law passed by the U.S. Congress in 2005 imposed strict limits on eligibility for Chapter 7 bankruptcy. This means test determines whether an individual’s net income is too high, using thresholds established by statute. Chapter 7 bankruptcy offers many benefits to certain debtors, but those who cannot pass the means test must instead use a Chapter 13 proceeding.

The Chapter 7 means test was part of the Bankruptcy Abuse Prevention and Consumer Protection Act, enacted by the U.S. Congress and signed by the president in April 2005. The law substantially changed the federal bankruptcy system, adding requirements like credit counseling, limiting certain exemptions, and extending the waiting periods between bankruptcy petitions. The means test was one of the most controversial provisions of the law, earning the opposition of consumer advocates and the support of banks and other creditors. It enables a bankruptcy court to dismiss a personal Chapter 7 case involving “primarily consumer debt,” or to convert it to a Chapter 13 case, if it finds that “abuse” has occurred or would occur. 11 U.S.C. § 707(b). “Abuse” could involve a debtor’s actual bad faith, or the court may make a presumption of abuse if the debtor’s net income does not pass the means test

In the Chapter 7 means test, the debtor must compare their income to the median income for same-sized households in their state. The U.S. Census Bureau provides this information on a periodic basis. In California, the median annual income for a single-person household as of May 1, 2013 is $48,415. For a family of four, the median is $75,656. Debtors whose income is below the median automatically pass the means test.

Debtors whose income exceeds the median may still pass the means test, but they must perform additional, far more complicated calculations. They must determine whether they have sufficient “disposable income” to pay at least some of their debts. Their disposable income is based on both national and local standards, many promulgated by the Census Bureau, for expenses related to health and disability insurance, protection of the family from domestic violence, health care for a dependent relative, care of dependent children, housing and utilities, and payments on secured debts. The debtor passes the means test if their monthly disposable income, when multiplied by sixty, is less than either (1) the greater of twenty-five percent of the debtor’s “nonpriority unsecured claims, or $6,000”; or (2) $10,000. 11 U.S.C. § 707(b)(2)(B)(iv). Other limited factors may also rebut the presumption of abuse if disposable income exceeds these amounts.

Bankruptcy attorney Devin Sawdayi has guided people in the Los Angeles area through Chapter 7 bankruptcies since 1997. A Chapter 7 bankruptcy offers relief to people whose income is not sufficient to service their debts. A court-appointed trustee may sell non-exempt assets to pay down debts, and the court may discharge some debts entirely at the conclusion of the case. Our office is dedicated to helping people in financial distress rebuild their lives with dignity and respect. To schedule a free and confidential consultation to see how we can help you, please contact us today online or at (310) 475-9399.

More Blog Posts:

California Bankruptcy Court Rules on Discharge of Debt Allegedly Incurred Through Fraud, Los Angeles Bankruptcy Lawyer Blawg, September 7, 2013

Late Challenge By Creditor Allowed in Chapter 7 Case Because Debtor Did Not Give Adequate Notice, Los Angeles Bankruptcy Lawyer Blawg, August 30, 2013

Mortgage Debt is Dischargeable in a Chapter 7 Bankruptcy Case, According to Los Angeles Federal District Court, Los Angeles Bankruptcy Lawyer Blawg, August 28, 2013

Photo credit: Standard form of the U.S. Department of Justice.