Understanding the Means Test for Chapter 7 Bankruptcy Cases

A Chapter 7 bankruptcy allows you to discharge most of your debts without any further obligation to repay. But not all debtors are eligible for Chapter 7 protection. In 2005, Congress amended the bankruptcy laws to require all debtors pass a “means test” to establish they lack sufficient monthly income to repay their creditors. Debtors who “fail” the means test are not without options, however; they can still file for Chapter 13 bankruptcy, which affords them an opportunity to negotiate a repayment plan with their creditors that may last up to 5 years.

Where You Live Affects Your Eligibility

The means test is not uniform throughout the country. Depending on where you live, there are different income and expense thresholds. The “median family income” for your state is the first part of the means test. Here in Oklahoma, for example, the median family income for a two-person household is $56,532. So if you live in a two-person household with an income below this level, you have “passed” the means test and qualify for Chapter 7 bankruptcy protection.

But even if your income exceeds the median, that is not the end of the means test. At this point, you would then need to calculate your “disposable income,” i.e. how much you have left each month to repay your creditors after deducting certain necessary household and living expenses. For the most part, your living expenses are not based on what you actually pay, but rather you must refer to the National and Local Standards established by the Internal Revenue Service.

As the name implies, some of the National and Local Standards are the same regardless of where you live. For instance, for a two-person household, the national standard allowance for food is currently $612 per month. Other standards are state-specific, such as housing and utility expenses. Indeed, combined housing and utility expenses are set on a per-county basis. Here in Oklahoma County, a two-person household has an allowance of $512 per month if they do not have a mortgage, or $930 per month if they do.

Need Help With a Chapter 7 Bankruptcy?

Please note that all figures cited above are subject to change. The means test is something of a moving target, and its application will vary depending on your exact household situation. That is why you should work with an Oklahoma City bankruptcy attorney if you are contemplating a Chapter 7 filing. Contact the offices of Deborah Brooks & Associates, P.C., to speak with a lawyer today