One of the most common questions I get asked regarding Chapter 7 bankruptcy is regarding the means test and what it takes to qualify for bankruptcy. Basically, if your current income is lower than the IRS average income for a comparable family size then you are allowed to file for chapter 7 bankruptcy protection. This is a simple way of describing the means test but what happens if your income is higher than the average? For those people wondering the same question, I am going to go over the Chapter 7 means test in more detail.
The means test actually consists of several steps. The first step in the Chapter 7 bankruptcy means test is simple: You compare your income to the median income in your state for a family the same size as yours. If your income adjusted for family size falls below those numbers, that's it. You can be fairly certain that it is possible to file for chapter 7 bankruptcy. If your income is higher than the median income, it doesn't necessarily mean that you can't file for Chapter 7 bankruptcy; it just triggers the second step in the test.
In this second arm of the means test, a bankruptcy attorney will review your financial situation. Certain allowable expenses (as determined by IRS guidelines) are subtracted from your income to find your "disposable income." If your projected disposable income over the next five years totals less than $6,000 ($100/month), you should be able to file bankruptcy under Chapter 7. If your disposable income is greater than $10,000 over the next five years, a presumption arises that you don't really need to file for Chapter 7 bankruptcy and you may only be allowed to do so if you can demonstrate special circumstances. In the gray area between $6,000 and $10,000, yet another calculation is often required which compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible.
One obvious "special circumstance" might be that the debtor is now unemployed and doesn't really have the ability to pay that a means test may suggest. So even if you think that you may not qualify for Chapter 7 bankruptcy, it's always worthwhile consulting with an experienced bankruptcy attorney to discuss your unique financial situation. If you have further questions regarding filing for bankruptcy, I offer a free 30 minute telephone consultation where you can get all your questions answered.