The Bankruptcy Means Test
The United States Bankruptcy Code requires those planning to file bankruptcy to pass a means test. The means test is designed to prevent those with high incomes from having all their debts discharged in a Chapter 7 Bankruptcy. The rules of the means test are as follows: Those who make above the median income in their state, city or area, must file Chapter 13 bankruptcy and pay back a portion of their debts over a five year period. Those who earn below the median income in their state, city or area can go ahead and file Chapter 7 bankruptcy and have most if not all of their debts discharged in bankruptcy.
There are more factors besides just median income in play here. Those who have high incomes, but also have lots of expenses that eat up a big chunk of their income may still qualify for a Chapter 7 bankruptcy. The formula for the means test takes a person's income and deducts certain expenses to arrive at disposable income. If a person's disposable income is sufficient to pay off some or all of outstanding debt, that person may be forced to file a Chapter 13 bankruptcy and make monthly payments to the bankruptcy court over a five year period. If there is little or no disposable income, a person will probably be able to file Chapter 7 bankruptcy, even if she earns more than the median income.
So how do you know if your income after allowable expenses is above or below the median in your state, city or area? The Department of Justice Trustee Program actually compiles data supplied by the Census Bureau and formulates a median income for each state for one to four people, and adds an additional amount for each person living in the household beyond four people based on the census data and the consumer price index. The median income is adjusted each year. Those filing bankruptcy are required to list the applicable median income provided by the Department of Justice on either Form 22A or 22C as a requirement for filing bankruptcy.
Visit the Department of Justice website for the actual figures about the median incomes in your state that you will be required to use. The Department of Justice, Trustee Program, oversees the calculation of the median incomes used in the bankruptcy means test to determine if one qualifies for either Chapter 7 or Chapter 13 bankruptcy.
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