How bankruptcy means testing works (2023)

In 2005, Congress passed a hotly contested bankruptcy bill that tightened bankruptcy eligibility rules, thereby placing greater restrictions on eligibility to file Chapter 7 bankruptcy. One of the measures implemented by the new law was the bankruptcy means test.

What is the bankruptcy means test?

The means test is the national, standardized way to determine how much of your debts you can feasibly repay (which may be very little). The results largely determine whether you qualify to file for Chapter 7 bankruptcy.

If you don’t meet the requirements and want to move forward with Chapter 13 bankruptcy instead, you’ll likely take a similar means test to assess the amount you’ll repay in a debt settlement plan.

Most individuals will complete some form of the means test when filing for bankruptcy.

How does it work?

The means test takes a snapshot of the last six months of your income and compares it to the median income in your state and to your personal debt and expenses.

Determines your total income

To average out any inconsistencies from seasonal earnings, the means test considers your total income for the six months prior to the month of your bankruptcy filing. For example, if you plan to file in July, the means test will evaluate your earnings for January through June.

To form a picture of your annual income, your six month earnings are used to calculate one average monthly income and then multiplied by 12. This also makes it easy to compare it to the statewide median annual income.

Cost of living

Since the cost of living varies greatly depending on your location, the means test considers how your income measures up to the median income for households of the same size within your state of residency.

If you earn less than the median income in your state, you automatically pass the means test.

As of October 2022, the Department of Justice reports this median income data for the following states.

State1 EarnerFamily Size
2 People3 People4 People*
*To calculate median income for large households, add $9,900 per person over 4. Note: These numbers change several times each year to most accurately reflect the median income. Please consult the most recent median income numbers for your state.

For example, in a household of four, with an annualized income of about $70,500, you would automatically pass in all of the states listed above, since your earnings are below average. However, if you made the same amount of money, but only had two people in your household, you wouldn’t get an automatic pass in Alabama or Arkansas.

If you earn above the median income it is still possible for you to pass the means test by taking deductions.

Personal expenses

The test allows you to deduct acceptable expenses to determine how much you can afford to repay your creditors.

Acceptable deductions include the costs for housing, utilities, transportation, groceries, childcare, healthcare and other basic necessities. Secured debt payments, court-ordered payments, life insurance and other paycheck withholdings are also considered allowable expenses.

There are deduction limits for each category determined at both the state and federal level to guide your calculations.

Assess the numbers

The difference between your monthly income and expenses determines your discretionary funds. For example, if your monthly income is $5,800 per month and your expenses are $5,600, you have $200 in monthly discretionary funds.

The means test assumes that these discretionary funds are available for debt repayment and calculates how much you could repay in total over five years, or 60 monthly payments.

If the amount is under $9,075 or covers less than 25% of your total unsecured debt, you pass the means test.

If you can repay more than $15,050 or over 25% of your debt, there is a presumption of bankruptcy abuse and you need to either claim special circumstances that would still allow you to pass or consider another solution, such as Chapter 13 bankruptcy.

What to do if you pass

If you pass the means test, you cleared a major step to file Chapter 7. An optional next step is to get a lawyer. (You could also hire a lawyer as a first step to assist you in completing the means test.)

While you don’t need a bankruptcy attorney, one can be a valuable guide and increase your chance of success. The National Bankruptcy Forum estimates the total cost to file Chapter 7 with a lawyer ranges from $1,500 to $3,000. Many offer a free consultation.

Whether you work with a lawyer or not, you’ll also need to:

  1. Complete credit counseling. You are required to attend a credit counseling course no more than 180 days before you file for bankruptcy. A counselor can help you assess the best option for your circumstances. Many reputable credit counselors often offer their service for free or at low cost.
  2. Document your finances. You need to fill out the appropriate bankruptcy documents for the U.S. Court system.
  3. Be ready to pay some fees. Filing for bankruptcy isn’t free. It costs $338 to file a new petition and there are a series of miscellaneous court fees, including a $78 administrative fee.

With these steps done, you’re likely ready to petition for bankruptcy.

What to do if you fail

If you don’t pass the means test, you still have options.

Completing the required credit counseling could help you evaluate your next steps. Consider tapping the National Foundation for Credit Counseling, a network of nonprofit agencies, to start your search for help.

One option is to complete the other requirements and file for Chapter 7 anyway, noting special circumstances.

You could also switch your focus and aim for Chapter 13 bankruptcy. The result of the means test will help determine how much disposable income you have available for debt repayment in that type of filing.

Moving forward after bankruptcy

The US Bankruptcy Code allows debtors the opportunity to escape paralyzing debt and gain a fresh start. Despite the freedom that bankruptcy can offer, rebuilding your credit will require some time and effort.

The best thing you can do to rebuild credit is to pay your bills on time. The largest component of your FICO credit score is payment history (35%), followed closely by amounts owed (30%) and then length of credit history (10%), credit mix (10%) and new credit (10%).

Make sure to cover at least the minimum payment for all of your bills. If possible, set up automatic bill pay to ensure you’re not late on payments.

Following the bankruptcy discharge, when the process is complete, you’ll be eligible to take on new debt and start rebuilding your score that way as well. But given the severe negative impact of bankruptcy on your credit score, many lenders may not be willing to extend unsecured credit.

Instead, consider secured credit. Secured credit cards cover your credit line by retaining a cash deposit to protect the creditor if you default on your payment. Despite the difference in collateral, secured credit cards will impact your credit score just like unsecured cards.

Frequently asked questions (FAQs)

Chapter 7 bankruptcy protects certain cash assets. The federal government exempts an $1,512,350 in eligible retirement accounts. Additionally, funds held in Education IRAs, tuition savings, ABLE accounts are exempt unless those funds were deposited within the last one to three years. For those recent deposits, the federal government exempts $7,575.

Calculate all earnings for the six full months prior to your bankruptcy filing month. You should include wages, unemployment retirement payment, alimony, child support, any regular payment other family members make and all business or rental income. Benefits from the Social Security Administration are not considered income.

Divide this number by six to calculate your average monthly income and multiple that number by 12 to identify your annual income for bankruptcy.

You are exempt from the means test if more than 50% of your debt is business debt rather than consumer debt. Additionally, military service members may be exempt if they:

  • Are a disabled veteran who acquired most of their debt while on active duty
  • Are a Reservists or National Guard personnel who was called to active duty following September 11, 2001 and performed a homeland defense activity.


How bankruptcy means testing works? ›

The means test compares a debtor's income for the previous six months to what he or she owes on debts. If a person has enough money coming in to gradually pay down debts, the bankruptcy judge is unlikely to allow a Chapter 7 discharge.

What is income for the means test in bankruptcy? ›

Income from all sources over the previous six months must be included as part of the Means Test calculation. That means both taxed and untaxed income, including wages, salary, tips, bonuses, interest, dividends, royalties, retirement income, unemployment and workers' compensation, and others.

How to pass the Chapter 7 means test with high income? ›

Expenses That Will Help You Pass the Chapter 7 Means Test
  1. House, car, and other secured debt payments. ...
  2. Overdue taxes. ...
  3. Court-ordered payments and arrearages. ...
  4. Child care. ...
  5. Involuntary deductions. ...
  6. Health, disability, or term life insurance. ...
  7. Other healthcare expenses. ...
  8. Education for employment or a disabled child.

Does bankruptcy means test use gross or net income? ›

To determine your Chapter 7 bankruptcy income limit, add the last six months of your gross income – this is what you earned before taxes and other deductions were taken out.

How do you know if you pass means test? ›

You pass the means test if your means test calculation shows a negative number or a number close to zero. This means you don't have disposable income left over after paying your monthly expenses and you're eligible to file for Chapter 7 bankruptcy relief.

How is the means test calculated? ›

The means test is calculated by comparing the debtor's average income for the past six months (current monthly income), annualized, to the median income for households of the same size in the debtor's state of residence.

What income is excluded from means test? ›

You do not have to include payments received under the Social Security Act. Such as SSDI, SSI, and Social Security retirement as monthly income on the Bankruptcy Means Test. Although, you need to include this income when you complete other bankruptcy forms.

Is it hard to pass the means test? ›

It takes into account your income, expenses and family size to determine whether you have enough disposable income to repay your debts. Although it was designed to restrict the number of debtors who can get their debts forgiven through a Chapter 7 bankruptcy, most people who take the means test pass it easily.

Why would a Chapter 7 be denied? ›

The court may deny a chapter 7 discharge for any of the reasons described in section 727(a) of the Bankruptcy Code, including failure to provide requested tax documents; failure to complete a course on personal financial management; transfer or concealment of property with intent to hinder, delay, or defraud creditors; ...

How much is too much disposable income for Chapter 7? ›

If the debtor's disposable income, projected for a five-year period, is more than 25 percent of the total unsecured debt, the debtor will likely be denied a Chapter 7 filing. If the percentage is less than 25 percent, the debtor will most likely survive the means test and be allowed to continue with a Chapter 7 filing.

Is cash considered an asset in bankruptcy? ›

If you are planning to file bankruptcy or have already done so, you may be wondering what will be considered an asset. An asset is anything of value that you own, including real estate, motor vehicles, bank accounts, investment accounts, furniture, jewelry, firearms, cash, books, stocks, pets and collectibles.

Does bankruptcy hurt taxes? ›

The good news is that you only lose the tax refund once, since any refund on income earned after a Chapter 7 bankruptcy belongs to you. With Chapter 13, you keep your assets, and you, the court, the trustee and your creditors agree to a repayment plan based on your monthly income.

What affects bankruptcy score? ›

Here are a few of the factors on how a bankruptcy score is calculated: An increase in the amount of credit a consumer is using. A lot of new loans, credit cards and payday loans. Carry a heavy debt burden are a long period of time.

What is the downside of Chapter 7? ›

The main cons to Chapter 7 bankruptcy are that most unsecured debts won't be erased, you may lose nonexempt property, and your credit score will likely take a temporary hit. While a successful bankruptcy filing can give you a fresh start, it's important to do your research before deciding what's right for you.

How is Chapter 7 means test calculated? ›

Total average monthly payment for all mortgages and other debts secured by your home. To calculate the total average monthly payment, add all amounts that are contractually due to each secured creditor in the 60 months after you file for bankruptcy. Then divide by 60.

What is an example of means testing? ›

For example, in countries with free college, wealthy people get something for free that they could easily pay for. The state is subsidizing a benefit for the rich at the same time that it's subsidizing a benefit for the poor and the middle class. That's one argument that's used in support of means-tested programs.

What happens if you fail the means test? ›

If the debtor fails the means test, the debtor can only apply for Chapter 13 bankruptcy. The purpose of the means test is to see that if the debtor is abusing the bankruptcy system by filing Chapter 7 bankruptcy cases even though they could afford to pay at least some of their debts.

What is the current monthly income means test? ›

The means test compares your current monthly income against your state's median income for a household of the same size. However, before comparing the two figures, you must convert your current monthly income to a yearly figure by multiplying it by 12.

What income is not countable? ›

For example, a $25 a birthday gift is not countable. In-kind income: Any gain or benefit not in the form of money and provided directly to the household. For example, a client's neighbor provides produce from his garden. Loans: Any amount of money that must be repaid is not countable as income.

What if my income goes up during a Chapter 7? ›

If you are part of a Chapter 7 bankruptcy and your income increases, speak with an attorney about whether you need to inform the court. The increase may not change your circumstances since a Chapter 7 bankruptcy is based on your financial circumstances at the time of your filing.

What is generally excluded from income? ›

Key Takeaways. Income excluded from the IRS's calculation of your income tax includes life insurance death benefit proceeds, child support, welfare, and municipal bond income. The exclusion rule is generally, if your "income" cannot be used as or to acquire food or shelter, it's not taxable.

How to pass means test with high income? ›

If a filer qualifies for an exception to the means test, they will file Form 122A-1Supp. You can earn a high income and still pass the means test if you have substantial expenses like a hefty mortgage, multiple car payments, taxes, childcare, health care, or care of an elderly or disabled person.

Can I quit my job to qualify for Chapter 7? ›

Yes. Most people receiving unemployment benefits choose to file Chapter 7. Usually, they qualify no later than six months after the job loss. It's even possible to qualify for Chapter 13 while unemployed, although less likely.

What is the difference between Chapter 7 11 and 13 bankruptcies? ›

Chapter 7 bankruptcy doesn't require a repayment plan but does require you to liquidate or sell nonexempt assets to pay back creditors. Chapter 13 bankruptcy eliminates qualified debt through a repayment plan over a three- or five-year period.

What assets do you lose in Chapter 7? ›

What Assets are NOT Exempt in Chapter 7?
  • Additional home or residential property that is not your primary residence.
  • Investments that are not part of your retirement accounts.
  • An expensive vehicle(s) not covered by bankruptcy exemptions.
  • High-priced collectibles.
  • Luxury items.
  • Expensive clothing and jewelry.

Do creditors get mad when you file Chapter 7? ›

They don't get mad when they get your bankruptcy filing and they don't cry when they get your bankruptcy filing. Instead, they process the bankruptcy notice along with the thousands of others they get each year without an ounce of emotion about it.

Can creditors come after you after Chapter 7? ›

Debt collectors cannot try to collect on debts that were discharged in bankruptcy. Also, if you file for bankruptcy, debt collectors are not allowed to continue collection activities while the bankruptcy case is pending in court.

How much debt can you have in a Chapter 7? ›

There is no ceiling on the amount of debt with which you can file for Chapter 7 bankruptcy. Chapter 7 also is often preferred over Chapter 13 because it wipes out debt and doesn't involve repayment. The rules under Chapter 13 are more stringent, but Chapter 7 is open to any individual with any amount of debt.

How does Chapter 7 affect your life? ›

In a Chapter 7 bankruptcy, most of your assets will be sold off to pay your creditors. In a Chapter 13 bankruptcy, you get to keep more of your assets but must repay your creditors in three to five years. Chapter 7 will remain on your credit report for up to 10 years, while Chapter 13 will remain for up to seven years.

Why do millionaires file bankruptcies? ›

Sometimes only bankruptcy can satisfy all of their creditor obligations. When a millionaire's income source is strong and constant, they have the ability to indulge in an expense lifestyle. If this lifestyle cannot be supported after a financial downturn, the assets of the millionaire are depleted quickly.

How many months of bank statements for Chapter 7? ›

Last six months of bank statements. Every bankruptcy trustee will ask for bank statements. The debtor's attorney must review bank statements to uncover suspicious transactions before filing the case. Proof of insurance on all property secured by a lien.

Can you have money in the bank if you file bankruptcy? ›

You can keep cash in Chapter 7 bankruptcy if it qualifies as an exempt asset under bankruptcy exemption laws. Get debt relief now. We've helped 205 clients find attorneys today.

Should I close my bank account before filing bankruptcy? ›

You'll want to open checking and savings accounts at a bank that doesn't service any of your debt and use the new account for banking purposes before filing bankruptcy. Again, you don't need to close other accounts—leave them open and report all accounts when filling out your bankruptcy paperwork.

What not to do after filing Chapter 7? ›

There are certain things you cannot do after filing for bankruptcy. For example, you can't discharge debts related to recent taxes, alimony, child support, and court orders. You may also not be allowed to keep certain assets, credit cards, or bank accounts, nor can you borrow money without court approval.

Do you lose everything when you file Chapter 7? ›

The majority of those who file Chapter 7 bankruptcy do not lose any of their assets, but it's possible to lose nonexempt assets and properties when filing. A nonexempt asset is something that can be sold by a trustee to pay creditors.

What can you write off in bankruptcies? ›

Allowable expenses include administrative expenses. Administrative expenses can only be deducted by the estate, never by the debtor. The bankruptcy estate is allowed deductions for bankruptcy administrative expenses and fees, including accounting fees, attorney fees, and court costs.

What are three negative effects of filing bankruptcy? ›

Negative Impacts of Bankruptcy
  • Your credit will be shot. Anyone considering bankruptcy needs to keep in mind that their credit reports and credit score will take a major hit—one that can last for years. ...
  • You may lose your property. ...
  • There could be a psychological impact, too.

How bad does bankruptcy look? ›

Bankruptcies are considered negative information on your credit report, and can affect how future lenders view you. Seeing a bankruptcy on your credit file may prompt creditors to decline extending you credit or to offer you higher interest rates and less favorable terms if they do decide to give you credit.

What credit score will I have after bankruptcy? ›

Generally, your credit score will be lowered by 100 points or more within two to three months. The average debtor will have a 500 to 550 credit score. It may be lower if the debtor already had a bad score before filing. In summary, your credit score won't be that great after Chapter 7.

Is Chapter 7 or 13 worse? ›

Chapter 7 stays on your record for 10 years, while Chapter 13 stays for seven years. That would seem to suggest that Chapter 7 is worse for your credit score, but with Chapter 7, your debt, or at least the unsecured debt, will be gone. That means you can try to start rebuilding it immediately.

Why is Chapter 13 better than Chapter 7? ›

The biggest difference between Chapter 7 and Chapter 13 is that Chapter 7 focuses on discharging (getting rid of) unsecured debt such as credit cards, personal loans and medical bills while Chapter 13 allows you to catch up on secured debts like your home or your car while also discharging unsecured debt.

Why do many people prefer Chapter 11 to Chapter 7? ›

Many large companies file under Chapter 11 of the Bankruptcy Code rather than Chapter 7 because they can still run their business, control the bankruptcy process and attempt to become profitable again while seeking protection from their creditors.

Do you pay back Chapter 7? ›

A chapter 7 bankruptcy case does not involve the filing of a plan of repayment as in chapter 13. Instead, the bankruptcy trustee gathers and sells the debtor's nonexempt assets and uses the proceeds of such assets to pay holders of claims (creditors) in accordance with the provisions of the Bankruptcy Code.

Does Chapter 7 means test use gross or net income? ›

To determine your Chapter 7 bankruptcy income limit, add the last six months of your gross income – this is what you earned before taxes and other deductions were taken out.

How is means test calculated? ›

The means test assesses all cash income that you expect to get in the forthcoming year. In practice, this is usually assessed by calculating the income you actually received in the previous year.

What is the means test formula? ›

The means test is calculated by comparing the debtor's average income for the past six months (current monthly income), annualized, to the median income for households of the same size in the debtor's state of residence.

How is the means-tested? ›

They use an income test and an assets test to work out her means tested amount. This determines: if she will receive Government support with her accommodation costs, or if she will need to pay the room price negotiated with her aged care provider. if she will pay a means tested care fee.

What is means tested income? ›

A means test determines if a person or household is eligible to receive some sort of benefit or payment. Means-tested benefits include many government assistance and state and federal welfare programs that measure a family's income against the federal poverty line.

What is chapter 13 means test disposable income? ›

The chapter 13 disposable income test is the court's way of ensuring that all your disposable income is going towards repaying your debts during your repayment period. Prior to approving any chapter 13 repayment plan, you must show that what you are paying is your best effort.

What is determined as income? ›

Gross income includes your wages, dividends, capital gains, business income, retirement distributions as well as other income. Adjustments to Income include such items as Educator expenses, Student loan interest, Alimony payments or contributions to a retirement account.

How is a 401k considered for the bankruptcy means test? ›

In the Means Test, all income received by a Debtor, with the exception of Social Security benefits, is considered income. Regular income, rental income, investment gain, unemployment compensation, payments from a pension plan or a 401(k) account and retirement benefits are all considered income under the Means Test.

What are the alternatives to means testing? ›

One alternative is a social insurance program based on right rather than need. Other alternatives include scales of flat-rate benefits applied according to levels of applicants' income.

What would means testing for Social Security look like? ›

In its simplest form, means-testing would look at the annual income of Social Security beneficiaries and determine, based on that income, whether they'd receive a reduced benefit check, or no benefit check at all.

What is the average monthly payment for Chapter 13? ›

A Chapter 13 petition for bankruptcy will likely necessitate a $500 to $600 monthly payment, especially for debtors paying at least one automobile through the payment plan. However, since the bankruptcy court will consider a large number of factors, this estimate could vary greatly.

How does IRS determine disposable income? ›

What is Disposable Personal Income? After-tax income. The amount that U.S. residents have left to spend or save after paying taxes is important not just to individuals but to the whole economy. The formula is simple: personal income minus personal current taxes.

What determines Chapter 13 payment? ›

Once you deduct your expenses from your income, you're left with your disposable income. Your disposable income gets applied to your debts according to priorities. To calculate your Chapter 13 monthly payment amount, you compare your disposable income to your debts.

What are the 4 factors of income? ›

In economic theory the four factors of production are labour, land, capital and enterprise. Each of these factors gets a return for their input into production and this is called Factor Income.

What are the two methods in determining the income? ›

Income Method. Product/ Value Added Method. Expenditure Method.

Can you lose your retirement in bankruptcies? ›

Retirement accounts are generally protected by bankruptcy exemptions. Exemptions protect retirement accounts in their entirety, except for traditional IRAs and Roth IRAs (see below). Some examples of these accounts include a 401(k), a 403(b), a profit-sharing plan, or a money purchase plan.

Can I cash out my 401k to avoid bankruptcy? ›

You can withdraw funds from your 401(k) to avoid filing for bankruptcy if you want to. However, those withdrawn funds might incur a 10% tax, impacting your retirement account more than you might have anticipated.

Can I cash out my 401k while in Chapter 13? ›

Can I Withdraw Or Take Out A Loan From My Retirement After Filing Bankruptcy? Regardless of whether you have filed a Chapter 7 or Chapter 13 bankruptcy, you cannot withdraw money OR take out a loan from your retirement account without court permission.


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