The Bankruptcy Means Test Explained: Do You Qualify for Chapter 7?
Filing for bankruptcy can feel overwhelming, especially when you’re unsure whether you qualify for Chapter 7. Chapter 7 bankruptcy, sometimes called “liquidation bankruptcy,” allows individuals to eliminate most unsecured debts, offering a fresh financial start. However, not everyone is eligible.
The bankruptcy means test determines if your income is low enough to qualify for Chapter 7 or if you may need to consider Chapter 13 instead.
At Watson Law Firm, we understand that facing financial challenges can feel overwhelming. With years of experience in bankruptcy law, we provide compassionate, personalized guidance to help you explore your options and find a path forward. We recognize that every client’s situation is unique, and we’re committed to listening carefully, answering your questions, and supporting you through this difficult time.
Whether you're considering Chapter 7 or Chapter 13 bankruptcy, we’re here to help you make informed decisions and work toward a fresh financial start.
What Is the Bankruptcy Means Test?
The bankruptcy means test was created to prevent higher-income individuals from filing for Chapter 7 when they might be able to repay at least a portion of their debts under Chapter 13. Essentially, it compares your household income to the median income in Arkansas for a household of your size.
If your income is below the state median, you typically qualify for Chapter 7. If it’s above the median, additional calculations are required to determine if you can still qualify. The test evaluates your disposable income after accounting for allowable expenses, such as rent, utilities, food, and healthcare costs.
How the Means Test Works in Arkansas
The means test begins with your current monthly income, averaged over the six months prior to filing for bankruptcy. This income includes wages, salaries, tips, bonuses, rental income, and other sources of household income.
Next, the test compares your income to the median for Arkansas households of your size. The median income is updated periodically and reflects what a typical household earns in the state.
If your income exceeds the median, the test moves to the next step: calculating allowable expenses. These expenses are subtracted from your monthly income to determine your disposable income. If your disposable income is low enough, you may still qualify for Chapter 7.
It’s important to understand that the means test is designed to be objective, but small changes in income or expenses can affect the results. For example, if a household’s income fluctuates seasonally, the average may paint a different picture than a single month’s paycheck.
Likewise, documenting all deductible expenses accurately can make a significant difference in whether a filer passes the test.
Allowable Expenses in the Means Test
Understanding which expenses are deductible is key to passing the means test. Common categories include:
Housing costs, such as rent or mortgage payments
Utilities like electricity, water, and heating
Food, clothing, and household supplies
Transportation costs, including car payments, insurance, and fuel
Health care expenses not covered by insurance
Taxes and mandatory payroll deductions
Some expenses are based on standard amounts set by the IRS or bankruptcy code, while others may require detailed documentation. For instance, medical expenses that are unusually high due to chronic conditions may be considered, but you must provide proof. Similarly, childcare expenses or costs associated with caring for elderly dependents may be factored in.
Common Questions About the Means Test
Many individuals considering bankruptcy have similar questions about the means test. Here are a few of the most common:
1. Can my income change my eligibility?
Yes. Your income is based on the six months before filing. If your income increases or decreases significantly after that period, it could affect your eligibility in future filings.
2. What counts as income?
The court considers wages, self-employment earnings, rental income, and other sources of household income. Some benefits, like Social Security, may be excluded, depending on circumstances.
3. What if my expenses are higher than the standard allowances?
The bankruptcy code allows for certain “special circumstances” expenses that exceed standard allowances. These require documentation and may include unusual medical costs or dependent care needs.
4. Is there a way to estimate my eligibility before filing?
You can complete a preliminary means test calculation using the information on your income and expenses. This gives a reasonable idea of whether Chapter 7 may be available.
5. Can past bankruptcy filings affect the means test?
Yes. If you have filed for bankruptcy in the past, your eligibility may be restricted, and certain debts may not be discharged.
These questions highlight how important it's to understand your individual financial situation before filing for bankruptcy. Carefully reviewing your income, expenses, and past filings can help you determine whether Chapter 7 is the right option for you.
Steps to Take If You’re Considering Chapter 7
If you think bankruptcy may be right for your situation, there are several steps to take:
Collect your financial documents, including income statements, bank records, and a list of debts.
Compare your income to the Arkansas median for your household size.
Calculate allowable expenses and determine your disposable income.
Consider whether you meet the criteria for Chapter 7 based on the means test.
Consult with an experienced bankruptcy attorney to review your results and discuss options.
Being organized before filing can save time and reduce stress. Keep in mind that accurate documentation of both income and expenses is critical for passing the means test. Even small errors or omissions can lead to delays or additional court scrutiny.
Real-Life Scenarios and Considerations
Understanding the means test is easier when you look at practical examples. Suppose a married couple in Little Rock has a combined monthly income slightly above the state median. Their allowable expenses, including mortgage payments, healthcare costs, and childcare, leave them with very little disposable income.
In such a case, the court may allow them to proceed with Chapter 7 despite exceeding the median income.
Conversely, a single individual with higher-than-average earnings but few deductible expenses may be directed toward Chapter 13. Chapter 13 allows for a structured repayment plan over three to five years, which could still provide relief from creditor collection efforts.
It’s also worth noting that certain debts, like student loans, taxes, and child support, aren't dischargeable under Chapter 7. Evaluating your specific debt types is essential before deciding which bankruptcy option aligns with your financial goals.
Potential Outcomes After the Means Test
Passing the means test typically results in a Chapter 7 filing that allows for the discharge of unsecured debts such as credit cards, medical bills, and personal loans. If the court determines that your income is too high, you may be directed to Chapter 13, which requires a repayment plan.
It’s important to note that the means test is only one part of the bankruptcy process. Other factors, including previous bankruptcy filings, asset exemptions, and secured debts, also affect overall eligibility and outcome.
Take Action for a Fresh Start
The bankruptcy means test is a critical tool for determining whether Chapter 7 is an option for residents of Arkansas. By comparing income to state medians and accounting for allowable expenses, the test helps identify those who may qualify for a discharge of unsecured debts.
Understanding how the test works can give you clarity about your financial options and help you plan your next steps.
At Watson Law Firm, we work with clients in Harrison, Arkansas, and throughout Boone County, Newton County, Marion County, and Baxter County to review their income, expenses, and household situation carefully. We provide guidance, answer questions, and help clients make informed decisions about Chapter 7 and Chapter 13 bankruptcy.
If you're struggling with debt and want to explore your options, contact me today to schedule a consultation and take the first step toward a fresh financial start.
