If you're researching Chapter 7 bankruptcy or Chapter 13 bankruptcy for any reason, you've probably come across the term "Means Test," but you may not fully understand what this term means or its place in bankruptcy.
The Means Test came to be a part of the Bankruptcy Code by way of the 2005 revisions/over-hall of the Bankruptcy Code known as the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). The new BAPCPA rules were introduced into the Bankruptcy Code because of perceived abuses of the Chapter 7 bankruptcy laws (basically, it was the feeling of law makers, swayed by heavy lobbying by financial institutions, that people who earned a high enough monthly income should be paying back some portion of their debts through a Chapter 13 bankruptcy, versus wiping out their bills entirely through a Chapter 7).
The Means Test was designed to limit the uses of the Chapter 7 bankruptcy laws to people who really cannot pay back their debts. It is Congress's attempt to push people with higher incomes out of a Chapter 7 bankruptcy and into a Chapter 13 bankruptcy, where that person's creditors will receive repayment of at least some portion of the debt that is owed. However, just because you may earn a high income does not necessarily mean that you can't/won't qualify for a Chapter 7 if your monthly expenses are also high.
So, in essence, you must pass the Means Test to be able to do a Chapter 7.
The Means Test is a backward-looking analysis of a person's income (from all sources) over the prior 6 months from the month that the person's bankruptcy paperwork was filed with the court, and the expenses of the person. The Means Test is actually a 2-step process to determine someone's eligibility to file a Chapter 7 Bankruptcy:
Step 1: Considers whether the person's gross yearly income is above or below the median income of the state in which that person lives for a household of the same size (for a married couple living together, the income of both spouses is considered whether filing jointly or individually);
If the answer to Step 1 is "below," the analysis stops, and the Means Test will indicate that the filing of a Chapter 7 bankruptcy would not be an abuse (meaning the filing of a Chapter 7 is ok).
Step 2: If the answer to Step 1 is "above," the Means test then starts to consider certain necessary and reasonable living expenses against gross income to determine eligibility to file a Chapter 7 by computing a person's "Disposable Monthly Income" (DMI). The expenses for the various living expenses categories considered by the Means Test is actually a combination of certain actual expenses incurred by the person filing, and certain set "credits" that come from the IRS's tax debt repayment standards.
If, after considering all allowable expenses and "credits," your DMI is low enough such that it will not allow you to pay back some meaningful portion of your debt, then the Means Test will indicate that the filing of a Chapter 7 bankruptcy is not an abuse, and you are ok to file. However, if your DMI is high enough such that you could pay back a meaningful portion of your debt, then the Means Test will indicate that the filing of a Chapter 7 is an abuse, and you must therefore look to a Chapter 13 bankruptcy to resolve your debt. It must be noted, however, that the Means Test only tells you whether you can file a Chapter 7 bankruptcy (i.e. is it an option), it does not tell you whether you
should file a Chapter 7.
The Means Test is actually 1 of 2 income analyses that are required as part of your bankruptcy paperwork. The other income analysis is a forward-looking analysis of income and expenses. Both analyses (the rear-looking Means Test, and the forward-looking income/expenses analysis) play a role in determining whether a Chapter 7 bankruptcy is available to you, and/or what your monthly plan payment will be in a Chapter 13 bankruptcy.
As you can see, determining whether you can and/or should file a Chapter 7 bankruptcy is actually quite complicated. It is recommended that you seek the representation of an experienced Chicago bankruptcy attorney to guide you through the process.