Chapter 7 Bankruptcy Analysis - Means Test

Anyone considering filing bankruptcy must decide which “type” of bankruptcy they should file. The different types of bankruptcy are designated by reference to specific “chapters” in the United States Bankruptcy code. For most private individuals with primarily consumer debts, the choice is ordinarily between filing chapter 7 bankruptcy or chapter 13 bankruptcy.

Choosing Between Chapter 13 and Chapter 7 Bankruptcy

While there are many important differences between chapter 13 and chapter 7 — discussed in other blogs on this site at some length — chapter 7 bankruptcy allows debt to be immediately dismissed or “discharged,” while chapter 13 involves a court-supervised repayment plan between three and five years in duration.

There are many factors to determine whether a person should file one type of bankruptcy or another. A person must qualify for a chapter 7 bankruptcy case by first undergoing a “means test” set forth in the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) passed by Congress in 2005.

Means Test for Chapter 7 Bankruptcy

The means test involves taking an average of your gross income over the past six months, regardless of whether or not you are still employed, and subtracting typical expenses for rent, food, insurance, transportation, child support (if applicable) and similar expenses. These expenses, based on averages, are determined by the IRS. These averages do not necessarily reflect your actual expenses. Certain types of income, like Social Security disability benefits, are not included in the six-month income average.

In the end, if there is at least $100 remaining after this calculation, the filer will almost certainly be required to file under chapter 13 and propose some type of payment plan that repays some or all of their debt during the 3-to-5-year life of the chapter 13 case.

Of course, every case is different. For example, one-time expenses or one-time surges in income may be factors and any means test result can be supplemented with an Affidavit explaining a unique situation. Only the bankruptcy court can determine ultimately whether a debtor has passed the means test or whether special circumstances permit the filing of chapter 7 bankruptcy. It is important to consult a qualified RGG Law attorney for guidance on these issues.