Are You Eligible for Chapter 7?
For many people considering bankruptcy, the “Means Test” is a major source of anxiety. It sounds complicated, invasive, and like a barrier designed to prevent people from getting the help they need. This fear often stops people from even exploring their options.
At The Brent W Davis and Associates Law Firm, we want to clear up the confusion. The Means Test is not a moral judgment or a test you can “fail.” It is simply a calculation required by federal law to direct filers to the appropriate bankruptcy chapter—either Chapter 7 (liquidation) or Chapter 13 (reorganization). Many Alabamians who initially believe they won’t qualify are surprised to learn they pass the test with flying colors once all their allowable expenses are factored in.
Step 1: The Median Income Test
The first part of the Means Test is a simple comparison. We look at your household’s average gross income over the last six months and compare it to the median income for a household of the same size in Alabama. These median income figures are updated regularly by the U.S. Census Bureau.
- If your income is below the Alabama median: You automatically pass this portion of the Means Test. There is a presumption that you do not have sufficient disposable income to fund a Chapter 13 repayment plan, and you are generally eligible to file for Chapter 7.
- If your income is above the Alabama median: This is where many people get discouraged, but they shouldn’t! This does NOT mean you are disqualified from Chapter 7. It simply means you must proceed to the second part of the test, where we get a much more detailed and accurate picture of your actual financial situation.
Step 2: The Disposable Income Calculation
If your income is above the median, the test becomes more complex, but also more personalized. This is where the guidance of an experienced bankruptcy attorney becomes invaluable. We deduct a series of allowed expenses from your income to determine your “disposable income.”
These deductions are a mix of your actual expenses and standardized amounts set by the IRS. They include:
- Taxes: Federal, state, and local income taxes, as well as Social Security and Medicare taxes.
- Secured Debt Payments: Your mortgage payments and car loan payments.
- Priority Debts: Payments for things like child support, alimony, or recent tax debts.
- Standard Living Expenses: The IRS sets standard allowances for food, clothing, housing, utilities, and transportation.
- Actual Expenses: We can also deduct the actual costs of health insurance, life insurance, childcare, and expenses required for your job.
After subtracting all these allowable expenses from your income, we arrive at your monthly disposable income. If this number falls below a certain threshold, you still pass the Means Test and can file for Chapter 7. The logic is that even though your gross income is high, your necessary expenses are also high, leaving you with little to no money to pay back unsecured creditors.
Why You Shouldn’t Try to Figure This Out Alone
The Means Test is a notoriously complex legal form with many nuances. A simple mistake—like miscalculating your income period or failing to include an allowable deduction—can lead to the wrong conclusion about your eligibility. It could even lead to your case being dismissed.
An experienced bankruptcy attorney knows exactly which deductions you are entitled to and how to apply them correctly. We can often identify legitimate expenses that clients overlook, making the difference between passing and failing the disposable income portion of the test.
If you are struggling with overwhelming debt, do not let the Means Test intimidate you. The first step is to understand your options with a professional who handles these calculations every single day. At The Brent W Davis and Associates Law Firm, our initial consultation is always free. We will analyze your income and expenses, run the Means Test for you, and give you a clear and honest assessment of whether Chapter 7 or Chapter 13 is the right path for your fresh start. Contact us today to get the clarity you deserve.
