Understanding the Bankruptcy Means Test: Are You Eligible?

For many individuals facing overwhelming debt, bankruptcy can provide a path to financial recovery. Among the various forms of bankruptcy, Chapter 7 is often sought after due to its ability to wipe out certain debts entirely, allowing a fresh start for those in financial distress. However, not everyone qualifies for Chapter 7 bankruptcy; eligibility is determined by the bankruptcy means test—a crucial step in the filing process that assesses whether an individual’s income is low enough to file for Chapter 7. This essay explores the intricacies of the bankruptcy means test, how it operates, who must take it, and what it signifies for Chapter 7 eligibility, with a focus on the state of Georgia.

What is the Bankruptcy Means Test?

The bankruptcy means test was established as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Its primary purpose is to prevent individuals with a significant income from wiping out their debts through Chapter 7 bankruptcy. Instead, those individuals are encouraged to file for Chapter 13 bankruptcy, which involves a structured repayment plan. The means test evaluates a debtor’s financial situation, specifically their income and expenses, to determine if they genuinely lack the means to repay their debts.

How Does the Means Test Work?

The means test is a two-step process that begins with comparing the debtor’s current monthly income to the median income level for a similar household size in their state. If a debtor’s income is below the state median, they typically qualify for Chapter 7 bankruptcy without further analysis. However, if their income exceeds the state median, the second step involves a more detailed examination of their financial situation.

In this second stage, allowable expenses are subtracted from the debtor’s income to calculate their disposable income. These expenses include costs such as housing, utilities, food, transportation, healthcare and other necessities based on national and local standards set by the IRS. If the remaining disposable income is not enough to pay off a portion of unsecured debts, the debtor may qualify for Chapter 7 bankruptcy.

Who Needs to Take the Means Test?

The means test is mandatory for most individuals seeking Chapter 7 bankruptcy. However, there are exceptions. Disabled veterans who incurred debt primarily during active duty or while performing homeland defense activities are exempt from the means test. Additionally, individuals whose debts are primarily business-related rather than consumer debts do not need to undergo the means test.

For residents of Georgia, state-specific median income levels and expense allowances are used to determine eligibility. These figures are periodically updated to reflect economic changes and cost-of-living adjustments, making it crucial for individuals to check the most current figures when considering bankruptcy.

Eligibility for Chapter 7 Bankruptcy 

The first step involves comparing the individual’s household income to the state’s median income level. As of the most recent data, the median income for a single individual in Georgia is approximately $56,000 annually. For a family of four, this figure rises to around $95,000. Those  who earn less than these amounts generally pass the means test outright.

For those with incomes exceeding the median, it’s important to carefully document and calculate allowable expenses to ensure an accurate assessment of disposable income. Georgia residents benefit from specific allowances and standards that reflect the current economy, which can impact the outcome of the means test. 

What Does Passing the Means Test Mean?

Passing the means test and qualifying for Chapter 7 bankruptcy means one can move forward with the bankruptcy process, which includes filing a petition and attending the mandatory meeting of creditors. Successfully completing Chapter 7 bankruptcy results in clearing eligible debts, providing the individual with a clean slate and an opportunity to rebuild their financial life.

Failing the means test doesn’t necessarily close the door on bankruptcy relief. Those who don’t qualify for Chapter 7 may still pursue Chapter 13 bankruptcy, which involves creating a repayment plan that spans three to five years. While Chapter 13 requires repayment of some debts, it offers benefits such as protecting assets from liquidation and allowing one to catch up on missed mortgage or car payments.

Contact Us Today

Navigating the complexities of the means test and bankruptcy process can be tough, but it is a step towards regaining financial stability. If you find yourself overwhelmed by debt, the experienced bankruptcy lawyers at Clark & Washington can help. We know this situation is complex and you just want to get back on your feet. Whether through Chapter 7 or Chapter 13 bankruptcy, relief from financial burden and a fresh start is within reach.

Call us today at (865) 689-1777 for a case consultation.