Chapter 7 Bankruptcy: A Means to the End of Your Credit Card Debt?
What Is the Chapter 7 Means Test?
As you may already know, Chapter 7 bankruptcy works to give consumers like you a fresh start from unsecured debts like credit cards, medical bills, payday loans and much more by discharging (excusing) those debts.
As Chapter 7 bankruptcy provides this complete discharge from most unsecured debts, lawmakers wanted to make sure that Chapter 7 bankruptcy is only used by those people who cannot pay off these debts.
Thus, the passage of the new bankruptcy law (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005) instituted a Chapter 7 means test to make sure that people weren’t using this form of bankruptcy as a get-out-of-jail-free card.
While the reasons behind the origins of the Chapter 7 means test may be debatable (the image of people abusing the system, recklessly racking up debts and filing bankruptcy to escape from their irresponsibility was overblown by the credit card industry and lobbyists in support of the controversial new law), the fact remains that the means test now exists to determine eligibility for Chapter 7 hopefuls.
The following page provides a nice introduction to the means test. However, as the means test can get complicated and involve a lot of numbers, it is generally a good idea to speak with a bankruptcy lawyer who can do the number-crunching for you and determine your Chapter 7 eligibility.
At Bankruptcy.Me, we make getting in touch with a local bankruptcy lawyer especially convenient – simply fill out our free bankruptcy case evaluation form or call (888) 632-0587, and we’ll quickly connect you with one of our sponsoring bankruptcy attorneys in your area.
The ensuing table provides you with the median income figures for all 50 states and Washington, D.C. This information was updated on April 19, 2010. (your Chapter 7 bankruptcy attorney will help you determine where you fall in line with the figures in your state).
What Does the Chapter 7 Means Test Mean to You?
In short, if you are interested in filing Chapter 7 bankruptcy, you will first have to take the Chapter 7 means test to determine if you are even eligible to file for this form of bankruptcy.
But don’t be thrown off or made nervous by the word “test” as the Chapter 7 means test is not like most other tests that you have taken!
What Makes up the Chapter 7 Means Test?
The Chapter 7 means test is made up of two parts:
- a comparison of your income with the median income in your state for a family of the same size as yours; and
- a calculation of your disposable income and unsecured debts.
If you are interested in filing Chapter 7 bankruptcy, your bankruptcy lawyer will walk you through the means test and help you determine whether you may file this form of personal bankruptcy.
With that said, the following information provides a brief breakdown of the steps that entail the Chapter 7 means test; for more insight into how this applies to your situation, speak to a Chapter 7 bankruptcy lawyer as soon as possible.
Your First Step in the Chapter 7 Means Test
During the first part of the means test, your Chapter 7 bankruptcy lawyer will compare your income with the median income in your state for the family that is the same size as yours.
Here’s what you need to know about the first step of the means test:
- Essentially, if your income is at or below the median income level in your state, you pass the means test, meaning that you are eligible to file Chapter 7 bankruptcy.
- If your income is above the median income level in your state, this does not mean that are ineligible to file Chapter 7 bankruptcy. Rather, it simply triggers the second part of the means test.
The ensuing table provides you with the median income figures for all 50 states and Washington, D.C. for all Chapter 7 bankruptcy cases filed on or after April 1, 2010 (your Chapter 7 bankruptcy attorney will help you determine where you fall in line with the figures in your state).
| State | Single-Earner | 2-Person | 3-Person | 4-Person* |
|---|
| * Add $7,500 for each individual in excess of 4. |
| Alabama | $38,278 | $47,904 | $55,433 | $65,079 |
| Alaska | $51,945 | $73,809 | $77,268 | $85,118 |
| Arizona | $42,476 | $56,692 | $61,845 | $69,205 |
| Arkansas | $33,412 | $44,257 | $48,548 | $57,699 |
| California | $47,969 | $64,647 | $70,638 | $79,194 |
| Colorado | $47,085 | $64,754 | $69,728 | $81,354 |
| Connecticut | $58,321 | $72,328 | $86,335 | $101,761 |
| Delaware | $46,249 | $60,736 | $69,826 | $88,409 |
| District Of Columbia | $42,120 | $68,647 | $69,047 | $69,047 |
| Florida | $41,079 | $52,073 | $58,366 | $68,763 |
| Georgia | $40,546 | $55,061 | $60,887 | $68,258 |
| Hawaii | $55,221 | $66,960 | $77,263 | $91,158 |
| Idaho | $39,484 | $51,291 | $52,577 | $61,830 |
| Illinois | $45,941 | $59,838 | $71,075 | $81,175 |
| Indiana | $40,683 | $52,367 | $59,438 | $70,621 |
| Iowa | $39,918 | $55,087 | $64,143 | $72,701 |
| Kansas | $41,210 | $57,561 | $63,212 | $72,352 |
| Kentucky | $37,450 | $45,491 | $54,488 | $64,230 |
| Louisiana | $37,331 | $48,115 | $53,271 | $66,020 |
| Maine | $38,674 | $50,731 | $61,855 | $70,124 |
| Maryland | $55,041 | $72,801 | $85,151 | $101,441 |
| Massachusetts | $53,315 | $69,204 | $82,297 | $99,293 |
| Michigan | $43,456 | $52,433 | $61,517 | $74,558 |
| Minnesota | $45,101 | $62,162 | $74,806 | $86,329 |
| Mississippi | $31,954 | $42,606 | $46,519 | $58,310 |
| Missouri | $39,504 | $51,385 | $60,156 | $70,806 |
| Montana | $39,979 | $52,310 | $58,427 | $65,593 |
| Nebraska | $40,208 | $56,659 | $63,475 | $72,284 |
| Nevada | $46,151 | $60,234 | $66,813 | $70,851 |
| New Hampshire | $51,332 | $63,976 | $79,385 | $93,592 |
| New Jersey | $59,812 | $71,744 | $85,764 | $102,894 |
| New Mexico | $36,642 | $50,457 | $50,457 | $55,363 |
| New York | $46,320 | $57,902 | $69,174 | $82,164 |
| North Carolina | $38,656 | $52,008 | $56,727 | $67,056 |
| North Dakota | $36,753 | $54,468 | $62,412 | $74,873 |
| Ohio | $41,724 | $52,030 | $61,552 | $73,040 |
| Oklahoma | $38,929 | $50,710 | $54,327 | $61,816 |
| Oregon | $42,344 | $55,820 | $62,608 | $72,408 |
| Pennsylvania | $44,396 | $53,572 | $67,516 | $77,590 |
| Rhode Island | $45,061 | $62,583 | $76,573 | $86,692 |
| South Carolina | $39,052 | $51,191 | $55,099 | $65,421 |
| South Dakota | $36,713 | $54,138 | $62,928 | $69,932 |
| Tennessee | $37,598 | $48,935 | $53,822 | $63,999 |
| Texas | $38,801 | $55,660 | $59,011 | $66,145 |
| Utah | $50,388 | $56,729 | $61,685 | $69,741 |
| Vermont | $41,593 | $56,656 | $65,094 | $73,899 |
| Virginia | $48,190 | $64,890 | $73,887 | $85,633 |
| Washington | $51,161 | $63,930 | $72,275 | $82,422 |
| West Virginia | $39,135 | $43,070 | $51,652 | $58,271 |
| Wisconsin | $42,205 | $57,201 | $67,881 | $80,243 |
| Wyoming | $44,004 | $59,617 | $65,586 | $76,690 |
| Commonwealth or U.S. Territory | Single-Earner | 2-Person | 3-Person | 4-Person* |
|---|
| * Add $7,500 for each individual in excess of 4. |
| Guam | $35,891 | $42,913 | $48,902 | $59,178 |
| Northern Mariana Islands | $24,101 | $24,101 | $28,040 | $41,242 |
| Puerto Rico | $20,331 | $20,311 | $23,113 | $27,434 |
| Virgin Islands | $28,476 | $34,225 | $36,491 | $39,980 |
Source: U.S. Trustee Program.
Note: State Median Income information may on a regular basis. We will do our best to update this page in a timely manner, but cannot guarantee that the information presented here is current.
The Next Step in the Means Test (If Necessary)
If it is determined in the first step of the Chapter 7 means test that your income is greater than the median income in your state, you will need to move to the next step to determine your Chapter 7 eligibility.
The second part of the Chapter 7 means test calculates your disposable income (the amount of money that you have for yourself at the end of the month after paying your necessary expenses) and compares that with your unsecured debts.
In short, you pass the means test and are eligible for Chapter 7 bankruptcy if your disposable income over the next five years is projected to be less than $6,000 ($100 a month).
Now if your disposable income is calculated to be greater than $10,000 over the next five years, it is presumed that you do not need to file Chapter 7 bankruptcy. In this case, you must demonstrate certain special circumstances in order to file Chapter 7 bankruptcy.
What Happens if Your Disposable Income is in a Gray Area?
If it is found that your calculated disposable income over the next five years is in the grey area between $6,000 and $10,000, another calculation will be required.
At this point, your disposable income over the next five years will be compared to a percentage of your unsecured debt to determine if you could realistically make significant payments to your creditors.
Here’s what will happen if your calculated disposable income over the next five years is:
- less than 25 percent of your unsecured debts – you pass the second part of the means test and will be eligible to file Chapter 7 bankruptcy.
- greater than 25 percent of your unsecured debts – it will be presumed that you don’t need to file Chapter 7 bankruptcy (just as if your calculated disposable income was greater than $10,000).
While the second step of the Chapter 7 means test can be a bit complicated, your bankruptcy lawyer can provide you with more clarity as it may apply to your current situation.
Is It Harder for You to File Bankruptcy Because of the Chapter 7 Means Test?
While the credit card industry and its lobbyists intended for the means test to make it harder for people to file Chapter 7 bankruptcy, most people have found that they have still been eligible for this bankruptcy protection after the new law.
When the means test was implemented, many expected the rate of Chapter 13 bankruptcy filings to shoot through the roof. While more people have recently filed Chapter 13, this can be attributed more to the current state of the economy than the implementation of the Chapter 7 means test.
As the Credit Slips Blog has noted, the ratio of Chapter 13 bankruptcies is gradually moving back to pre-BAPCPA levels, suggesting that means test limitations have not had the effect that many expected (in other words, you can still file for Chapter 7 bankruptcy!)
So while the myth exists that you can’t file Chapter 7 bankruptcy anymore, please remember that this is nothing more than a myth. And even if you don’t pass the means test, you may be still eligible for Chapter 13 bankruptcy.
Sort Out the Means Test with Your Chapter 7 Bankruptcy Lawyer
On the surface, the Chapter 7 means test may seem like an intimidating maze; remember that it doesn’t have to be, especially when you enlist the help of a local bankruptcy lawyer.
Getting in contact with a nearby bankruptcy lawyer is a great way to sort through the clutter of the means test and get the information most relevant to you: whether you are or are not eligible for filing Chapter 7 bankruptcy.
Your bankruptcy lawyer can complete the means test for you and come up with an answer to this question of your Chapter 7 eligibility.
All you have to do is fill out our free bankruptcy case evaluation form or call (888) 632-0587, and we’ll connect you with a local Chapter 7 bankruptcy lawyer as soon as possible.
The above summary is not legal advice. Laws may have changed since our last update. For the latest information on bankruptcy laws, speak to a local bankruptcy lawyer in your state.