What is the bankruptcy means test?

Step one: are you below the median?

Add up all household income received in the six full calendar months before the month you file, from every source except Social Security benefits and a few other exclusions. Divide by six. That is your current monthly income. Multiply by twelve.

Compare that annual figure to the median income for a household of your size in your state. The Department of Justice publishes the medians and updates them regularly.

If you are at or below the median, you pass. Chapter 7 is available, and the rest of the means test does not apply to you.

Step two: if you are above the median

You subtract allowed expenses from your current monthly income to arrive at disposable income. Some expenses use IRS national and local standards for things like food, clothing, housing, and transportation. Others use your actual costs: taxes, mandatory payroll deductions, health insurance, court-ordered support, secured debt payments on a house or car, and certain others.

If what remains is small enough, you pass and can file Chapter 7. If it is large enough to pay a meaningful portion of your unsecured debt over five years, the law presumes that a Chapter 7 filing would be an abuse, and you will generally need to file Chapter 13 instead, or show special circumstances that rebut the presumption.

Many people above the median still pass step two, especially if they have a mortgage, a car payment, high taxes, or significant medical or child care costs. If that is your situation, the above-median answer in this section walks through the long form in detail.

What counts as income

Wages, salary, bonuses, self-employment income, rental income, pension and retirement income, unemployment compensation in most districts, and regular contributions from anyone else toward household expenses. Social Security is excluded. A spouse’s income counts if you live together, even if the spouse is not filing, though some of it can be backed out if it is not used for household expenses. The what-counts-as-income answer in this section goes deeper, including why the month you file can change the result.

When the means test does not apply

• If your debts are primarily business debts rather than consumer debts.
• If you are a disabled veteran whose debts were incurred primarily during active duty or homeland defense activities.
• For certain reservists and National Guard members called to active duty.

Timing

Because the test looks back six months, a recent drop in income may not show up yet. Someone who lost a job two months ago may still be over the median on paper. Waiting a few months can change the result. Conversely, a recent raise or one-time payment can push you over the line temporarily. This is one of the more common reasons an attorney will suggest filing in a particular month.

Passing the means test is not the whole story

Even if you pass, the court and the trustee can still look at your actual budget. If your real monthly budget shows substantial money left over after reasonable expenses, a Chapter 7 case can be challenged. The means test is the formal screen, not the only one.