Filing for Chapter 7 bankruptcy can be a path to relief for many struggling with overwhelming debt. However, not everyone qualifies for this type of bankruptcy. One of the primary gatekeeping mechanisms is the “means test.” What should you know about this test?
What is the means test?
The means test is a formula used to determine whether an individual debtor’s income is low enough to file for Chapter 7 bankruptcy. By filtering out individuals with higher incomes who might be able to pay off their debts, the system reserves loan forgiveness through Chapter 7 as a relief option for those who lack the resources to pay.
How does the means test work?
The means test is a two-step process to determine whether your income falls into the range eligible for a Chapter 7 bankruptcy.
The first step involves examining average monthly income for the six months before you file for bankruptcy. If your income is below the median for a household of your size in your state, you pass the means test and can file for Chapter 7. For example, a household of four in Maryland filing after May 15, 2024, would qualify if their household income is less than $151,138.
If your income is above the state median, you proceed to the next step in the test. This involves a more detailed calculation to determine your monthly disposable income, subtracting certain expenses like food and housing from your total income.
What happens if you do not pass the means test?
While failing the means test does generally mean that you cannot file for Chapter 7 bankruptcy, you are not out of options. Chapter 13 bankruptcy may offer another way forward. Chapter 13 offers a structured way to repay debts while keeping your assets, and other debt relief options exist that might suit your specific financial situation.
Determining the right type of bankruptcy filing for your situation can be an important step toward achieving financial relief. Whether you pass the means test or need to explore other options, it is possible to respond to your financial challenges effectively and pave the way toward a more secure financial future.
