Chapter 7 Bankruptcy Protection and the Chapter 7 Means-Test

by Matthew Grech | Nov. 4, 2014 | Article |

Bankruptcy is one of those areas of law in which there are many misconceptions, which unfortunately often leads people to incorrect conclusions regarding Bankruptcy law. An area of Bankruptcy that is commonly misunderstood is the Chapter 7 Means-Test ("Means-Test"). To put it simply, the Means-Test helps determine whether or not a person qualifies to file for Chapter 7 Bankruptcy protection. Many people often get confused when it comes to the Means-Test because they fail to understand that, in its complete form, it is actually a two-part test. In other words, when considering the option of filing for Bankruptcy protection, many people "fail" the first part of the Means-Test, and then incorrectly conclude that they do not qualify to file a Chapter 7, without ever completing the second part.

The Means-Test governs whether or not a person qualifies to file for Chapter 7 Bankruptcy protection by determining whether that person's income is low enough to do so. If a person's income is below an average threshold, which is calculated based upon household size and county of residence, then that person "passes" the Means-Test and can presumably file a Chapter 7 Bankruptcy petition.

On the other hand, it is important to note that if a person's income is above the average threshold then he/she does not automatically fail the Means-Test. Rather, this person must simply complete the second part. The second part of the Means-Test permits a person to deduct specific monthly expenses from his/her current monthly income, thus enabling that person to potentially arrive at a number that is below the average threshold.

Therefore, the moral of the story is that the Means-Test is fluid and thus different for each person. Put another way, a person can earn significant monthly income and still qualify for a Chapter 7 if he/she has a lot of expenses, such as a high mortgage payment. For example, let us use two individuals who are hypothetically interested in filing for Chapter 7 Bankruptcy protection, who we will call Debtor A and Debtor B. Both Debtors live next-door to each other and both earn $100,000.00 in gross annual income. However, the similarities end there. Debtor A is single, claims no dependents on his tax return and lives with his parents, and thus has no significant monthly expenses. Debtor A in all likelihood will not pass the Means-Test due to his relative high income and lack of significant expenses. On the other hand, Debtor B is married and has two minor children. His wife is a homemaker and does not earn any outside income. Debtor B's mortgage payment is in excess of $4,000.00 per month and he is responsible for two car payments. Given these facts, Debtor B will likely pass the Means-Test and thus qualify to file for Chapter 7 Bankruptcy protection.

To further explore what Bankruptcy can offer you, please call Grech Legal at 650-549-7728 for a free debt consultation.