If you have the “means” to pay a meaningful amount to your creditors in a three-to-five-year Chapter 13 payment plan, you ought to be disqualified from being able to file a “straight bankruptcy” of Chapter 7. That’s the theory of the “means test.”
In practice, for many people it is quite an easy hoop to jump through. For most, it ultimately does not stop them from filing Chapter 7 if they want to do so. Yet, for a small percentage of bankruptcy filers, it does indeed disqualify them from Chapter 7. Where do you fall?
It’s basically a two-part test. First, the income portion, second the expenses portion. We’ll tell you the first part in this blog, the “easy hoop” we just mentioned. You should be able to calculate with a fair amount of accuracy whether you beat this part of the means test. If you do, you win—you very likely get to do a Chapter 7 case without even needing to take the second, lots more complicated part of the test. We’ll tackle that second part of the test in our next blog for those who can’t avoid it.
The first part of the means test compares your income to a published “median income” for a household of your size in your state. If your income is less than the median, you’re done with the test—you get to file under Chapter 7.
Your income for this test is based on the precise amount of income you received (from every source, not just taxable income, except social security-related benefits) during the six full calendar months before your case is filed. So, for example, if your case is filed on October 7, we look at every dollar you received in the six-month period from the prior April 1 through September 30.
Notice that if you have some flexibility about when your case is filed, and if your applicable income is not precisely the same all the time, then you may well be able to adjust the timing of your filing to reduce your income during the applicable 6-month period. Remember we’re including ALL income, including irregular ones like bonuses, unemployment benefits, and support payments.
Once you know when your Chapter 7 is being filed, and therefore know what income your household received during the prior 6 full calendar months, that income is essentially multiplied by two to arrive at an annual income. If you live in Oregon, compare that annual income amount to the following table of median incomes:
4 People *
* Add $7,500 for each individual in excess of 4.
If your income, as calculated in this precise fashion, is no more than the amount applicable for your family, then you can file a Chapter 7 case without having to do the expense side of the means test.
If your income is higher, don’t despair—once we go through the rest of the means test you may well still qualify. We have to tackle that in our next blog.