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Chapter 7 Means Test

The means test is a two part test used to ensure individuals do not abuse Chapter 7 bankruptcy.

Disabled veterans are exceptions to the means test.  Disabled veterans do not have to qualify under the means test if their disability rating is at least 30% and more than 1/2 of the veteran’s debt was acquired while on active duty or serving on homeland defense.

Step 1: average monthly income

First, the debtors average monthly income in the six months prior to filing a bankruptcy petition is calculated. This does not include, among other things, social security retirement benefits or income tax refunds.

Second, the average monthly income is multiplied by 12.

Third, this number is compared to the state mean household income for a household in the debtor’s state of the same size as the debtor’s household. The state mean family incomes can be found at http://www.justice.gov/ click “Means Test Information” under “Bankruptcy Reform.”

Finally, If the debtor’s number is equal to or below the state mean family income, then the debtor qualifies for Chapter 7 bankruptcy.

Example: Debtor earns $3,000 in months 1 and 2 and earns $0 in months 3, 4, 5, and 6. The debtor’s average monthly income for the 6 month period is $1,000. $1,000 multiplied by 12 is $12,000. Debtor is in a 2 person household involved in an Arlington TX Bankruptcy for example where (as of March 15, 2011) the median family income for a 2 person household is $46,900. Therefore, debtor qualifies under the means test because debtor’s number, $12,000, is less than $46,900.

How does spousal income affect means test?

The spouses income must be factored into the means test average monthly income unless you are separated from your spouse. However, if you separate from your spouse merely to qualify under the means test, you could face serious fraud charges.

Step 2: If the debtor does not qualify under Step 1 of the means test, then they must qualify under Step 2. A debtor qualifying under Step 1 of the means test, does not need to qualify under Step 2.

Take the debtor’s current disposable income and subtract expenses (standard and actual), and if the money left over is not enough to pay a portion of the debtor’s unsecured debt under a Chapter 13 reorganization plan, then the debtor qualifies for Chapter 7 despite failing the means test.

If the debtor fails the means test, then they may still apply for Chapter 7 and explain to the court special circumstances, such as recent unemployment or medical costs, that would allow the court to deny a motion to dismiss or transfer the Chapter 7 case.

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