About the Means Test

Determining Which Bankruptcy You Qualify For

In order to qualify for Chapter 7 bankruptcy, a debtor must pass a means test. This is a test that involves a specific formula that varies from state to state in order to determine whether the debtor has the financial means to pay creditors in a Chapter 13 repayment plan or if a Chapter 7 liquidation will be the individual's only option. The means test is determined by a variety of elements that are reviewed by our Chicago bankruptcy attorney.

The means test is based on the following factors:

• Your income
• Amount of expenses
• The median income in Illinois
• Family size

Steps of the Means Test

The first step of the means test begins by comparing your income to the median income in Illinois for a similarly sized family. If you do not pass the first step, you may still be able to qualify for a Chapter 7 case depending on the particular situation. While the income level comparison step might seem relatively simple, there is a second step to the process.

The second step is slightly more complicated and involves a breakdown of your expenses in order to calculate your available disposable income. There are particular costs that are considered allowable expenses by the IRS that can be subtracted from a person's income in order to determine this amount.

While the particular amount of allowed disposable income can vary depending on where the individual lives, a general guideline maintains that if that disposable income is less than $6,000, the individual can most likely be in the clear to continue with a Chapter 7. This can vary and is not guaranteed, so it is still important for you to discuss your particular situation with a qualified Chapter 7 bankruptcy lawyer.

What Are the Most Common Mistakes People Make When Taking the Means Test?

Navigating the means test can be challenging, and many people make common mistakes that could jeopardize their qualification for Chapter 7 bankruptcy.

• One of the most frequent errors is underreporting or overreporting income. Inaccurate income reporting can significantly alter the outcome of the means test.
• Another common mistake is failing to include all allowable expenses. This oversight can unfairly inflate the amount of disposable income calculated, which might disqualify someone from passing the test.
• Neglecting to update financial information, such as changes in income or family size, is another pitfall.
• Lastly, some individuals mistakenly believe they are automatically disqualified if their income exceeds the median level, overlooking the possibility of passing the second step of the means test through accurate expense reporting.

Importance of Legal Counsel

An experienced bankruptcy attorney can be an invaluable asset in navigating the complexities of the means test. They can ensure that all income and expenses are accurately reported, maximizing the chances of passing the test. A qualified attorney is also knowledgeable about permissible expenses and can advise on which can be legitimately deducted. They can provide guidance on updating financial information and help strategize the best approach for your specific situation.

Determining whether you qualify for Chapter 7 bankruptcy under the means test can be complicated, and if handled improperly, you could lose your chance to file under Chapter 7 altogether. Chicago bankruptcy attorney Joseph P. Doyle and his team members are experienced with these types of situations and can address your case in order to ensure that you are properly represented.

The Business Debt Exception to the Means Test

The means test is the requirement under the 2005 Bankruptcy Code Amendments that individual debtors fill out to determine if they qualify for a Chapter 7 bankruptcy. Under this form of the bankruptcy petition, an individual debtor enters their income against their own and standard IRS deductions to project an average monthly income that determines if they qualify. Normally, most individual debtors must "pass" this means test in order to qualify for Chapter 7 and thus a full discharge of their unsecured debt.

An exception to this requirement is found in 11 USC 707(b). This section deals with the dismissal of cases that are found to be an "abuse" of the requirements under the Bankruptcy Code, including and especially regarding a failure of the means test. Included in this language is the stipulation that the court may dismiss a case filed by an "individual debtor under this chapter whose debts are primarily consumer debts." Therefore, this implies then that an individual debtor will not be dismissed if the debt is primarily business in nature instead of the consumer.

What this has generally been construed to mean in a practical sense is that a case with 51% or more in business debt is one that satisfies this "business debt exception" to the means test. Therefore, if a debtor has more than 51% of his debt as business in nature, the means test will not apply to that case. This can help situations where income in the means test would be problematic in terms of qualifying for a Chapter 7 bankruptcy. Of course, there must still not be a large disparity of income to expenses in other areas of the petition, but the exception can be valuable nonetheless. Of course, these are complex bankruptcy matters, so consulting an attorney is the best route to follow. 

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