Chapter 7 Bankruptcy is designed to provide relief to people who, without question, cannot pay their debts. To meet this standard, the law requires you to prove that you sincerely do not have the means to pay your debts. This does not mean you have to be completely broke in order to file for bankruptcy, but there are income requirements you must meet.
Before you can file a petition for Chapter 7 Bankruptcy, you must pass a “means test.” This requires you to prove that either your income is below the median of your state, or that your debts are so extreme you do not have enough disposable income to ever pay them. The means test is a two-step process.
The first step is to show that your income is below the median of your state. Each state makes its own determination of median income by generating income data of its residents. Then, the groups are divided exactly in half. The half-way mark is the median.
You average your income for the six calendar months prior to the date you plan on filing your petition. If your income is below the median income for your state for households the same size as yours, you need go no further. You have passed the means test and can file for relief under Chapter 7. If your income is above the median, you must do a more detailed analysis.
If your income is above the median, the math becomes more complicated but you may still be able to file under Chapter 7. Your expenses are calculated and deducted from your income to see if you have any income left that can be used to pay your debts.
The catch is that each state has established “allowable” expenses, which is an amount you can spend on necessities like housing and transportation. You may have some expenses that are not allowable.
After you have added up all your allowable expenses, you deduct them from the income you calculated in Step 1. If you have disposable income, or income left over after the math calculation, you are expected to use that to pay at least some of your debts and can therefore, not file for Chapter 7 relief.
The means test can be complex and must comply with the requirements established in the Bankruptcy Code. An experienced bankruptcy attorney can assist you in determining whether or not you can pass the means test and qualify for filing a Chapter 7 bankruptcy petition. If you do not qualify, an attorney can discuss other options with you.