Filing a Chapter 7 “Straight Bankruptcy” Whether You Make More or Less than the “Median Family Income”

Law Office of Robert L. Firth Nov. 2, 2015

The amount of your income can qualify you for Chapter 7 if it’s not too high, and if too high there still may be ways to qualify.

Chapter 7 and the “Means Test”

The point of the means test is to require people filing bankruptcy to pay a meaningful portion of their debts if they have the “means” to do so. So those who do not pass the means test cannot get a discharge (legal write-off) of their debts through a Chapter 7 “straight bankruptcy.” Instead they would usually have to go through Chapter 13 “adjustment of debts” and be required to pay what they could afford to pay to their creditors over a period of 3 to 5 years.

The Steps of the “Means Test”

The means test is easily misunderstood. That’s not surprising given its multiple steps and its combination of rigid rules and how they are enforced. The following can help you understand the means test:

  • If your financial problems arise from business debts, the means test may not even apply to you. It only applies to individuals with “primarily consumer debts,” meaning that you skip the means test altogether and qualify for Chapter 7 if half or more of your debts were incurred for business purposes instead of “primarily for a personal, family, or household purpose.”

  • Focus on the first step of the means test—whether your income is above or below the “median family income” amount for your state and household size. That’s because a large majority of people who file Chapter 7 have lower incomes than the applicable median income. So they immediately pass the means test.

  • The means test uses an odd and very specific definition of “income” for its calculations. It counts as “income” virtually all sources of funds received (other than Social Security), not just taxable income. But it only counts funds received during the period of six-full-calendar-months prior to whatever date your Chapter 7 case is filed, and then doubling that amount for the annual “income.” The consequence of these odd rules defining “income” is that for if your “income” goes up and down at all, or if you have any recent irregular sources of “income, your “income” for the means test can shift up and down a lot depending on when you file your case. So through careful timing of the filing of your case you may be able to fit under the median income amount and qualify for Chapter 7.

  • Even if your income, as appropriately defined, is in fact over the applicable median income, that’s just the beginning of the analysis. There are a number of other steps to the means test, each with potential ways to pass the means test and qualify for Chapter 7.

  • You can deduct certain allowed living expenses from your monthly “income” to see if your “monthly disposable income” is low enough. The allowed amounts for some types of expenses are based on what you actually spend, some amounts are based on tables of local standards amounts, while others on national standards. If after applying those rules the amount left over—the “monthly disposable income”—is low enough, you can still file under Chapter 7.

  • If your “monthly disposable income” after deducting expenses is too high then depending on how much it is you may still qualify for Chapter 7 if the amount of “monthly disposable income” times 60 months would NOT pay at least 25% of your “general unsecured debts,” or if you can show “special circumstances.” Examples of appropriate “special circumstances” are “a serious medical condition or a call or order to active duty in the Armed Forces.”

In summary, even the relatively simple first step of the “means test”—comparing your “income” to the “median family income”—creates opportunities for qualifying because of the unusual definition of “income.” And even if your “income” is indeed too high at that first step, there are other steps to the “means test” which—although admittedly complicated—which may qualify you for Chapter 7.