The “means test” is a recent addition to the Bankruptcy Code – it was added in 2005.  However, the concept of means testing is not unique to bankruptcy law – it is used extensively by the IRS and other federal agencies.   Think of means testing as a way to limit the applicability of a law to people based on their income.

The Bankruptcy Code uses means testing to determine whether someone can file a Chapter 7 liquidation, or whether that person must file a Chapter 13 repayment plan.  Chapter 7 offers the advantage of wiping out debts completely, plus it only lasts about 5 months, whereas Chapter 13 obligates you (usually) to a five-year payment plan.   If you have the “means” or ability to pay, the Code says that you have to pay back some or all of your debt in a Chapter 13.

Not surprisingly the rules that make up the bankruptcy means test are confusing, complicated and sometimes lead to absurd results.   Since the question of whether you are eligible for Chapter 7, Chapter 13 or both is a threshold question, I find myself spending a lot of time looking at pay stubs and running means test calculations when I start working with a new or potential client.

Step 1 – Review Your Paychecks from Last Six Months

In theory, the means test helps your bankruptcy trustee and your bankruptcy judge determine if you have the financial capacity to pay back some of your debts, or whether your budget is simply too tight to allow for any repayment.  I start a means test analysis by looking at your household gross income for the last six months, and then divide by 6 to arrive at the average.  We must include in our calculations your income as well as your spouse’s and anyone else who earns money and lives in your home.

If this average falls below the “median income” for a similarly sized family in Georgia, you are considered a “below median” debtor and you are eligible for Chapter 7.  If the average exceeds the median income number, then we must plug in a set of budget numbers provided to us by the United States trustee to see if you have any disposable income available to pay creditors.  The median income numbers for Georgia change every 6 months or so – click the link to see the current figures which are posted on my blog.  Click to learn more about the median income test calculations in Atlanta bankruptcy case filings.

Step 2 – Over-median Debtors Must Complete Full Means Test

The details about how to enter numbers into a means test calculation can get very involved.   There are also exceptions to many parts of the means test.  As a general rule, it has been my experience that a single individual who earns more than about $45,000 annually, or a family of 4 that earns more than around $75,000 will have some difficulty qualifying for Chapter 7.   Again, there are exceptions, but this is a rule of thumb that I use.

I would also note that in my experience only about 10% of the debtors who might have qualified for Chapter 7 before the means test became law are now ineligible because of the means test.  However,  I would estimate that about 50% of the Chapter 13 cases I file require slightly to substantially higher monthly payments because of means test requirements.  Thus, the addition of a means test to the Code has resulted in bankruptcy relief being somewhat less beneficial and slightly less available.

If the means test dictates that you must file a Chapter 13, then I will evaluate your case as a Ch. 13 and use my knowledge of the Code and experience to present a plan that calls for a payment that you can afford.  One of my long time criticisms of the Chapter 13 process relates to the absence of any type of emergency fund allowance in a five year plan.  Thus, I take advantage of all of the approved budget figures to come up with a plan payment and plan terms that give you a reasonable chance at reorganization.

If you would like me to analyze your income statements and interpret what the means test says about your case, please visit my get started page.


Jonathan Ginsberg represents honest, hardworking men and women in the Atlanta area who need bankruptcy protection. Call him at 770-393-4985 for a confidential discussion.

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