What to know about the Chapter 7 means test

Consumers in Arkansas who see no way of paying their debts may file Chapter 7 bankruptcy, which allows the debtor to remove certain unsecured debts. However, debtors must sell some personal non-exempt assets under Chapter 7 to pay creditors. While most debtors file for Chapter 7, they have to pass a means test to qualify.

The Bankruptcy Abuse and Consumer Protection Act

Courts use the means test to determine if the debtor has the means to pay some of the debt. Congress amended the bankruptcy laws in 2005 to prevent high earners from abusing the system under the Bankruptcy Abuse and Consumer Protection Act.

The act added more requirements, such as a debt management course and a credit counseling from an approved agency 180 days before filing. The taxpayer must also show proof of income with tax returns they submit to the trustee, or they cannot proceed.

How the means test works

The means test commonly has two parts to find a debtor’s disposable income. The first part compares the debtor’s income to the median in their state for a same-size household, which varies between states. If the debtor’s income does not exceed that figure, they pass without going to the next step.

The second part adds gross income from the last six months, making the needed adjustments for decreases in income. The bankruptcy code has allowable expenses that figure into the amount, such as clothing, food and medical expenses.

Debtors who fail this portion may get redirected to Chapter 13, a type of bankruptcy that allows debtors to repay debts gradually. There are some exceptions that do not require the debtor to pass a means test, such as having mostly business debts or accumulating debt on active military duty.

Personal bankruptcy for Chapter 7 is commonly simple, and some debtors even represent themselves in court. However, to avoid case dismissal, a debtor should seek help from an attorney.