Am I Eligible For Chapter 7?

A debt discharge is the goal of consumer debtors when they file bankruptcy.  In Chapter 7, a discharge may not be available to everyone.  To ensure that potential filers were not abusing the system, Congress created a Mean’s Test that debtors must “pass” in order to invoke Chapter 7 bankruptcy relief.  When computing the Mean’s Test formula, there are several steps to determine whether a presumption of abuse arises.  The first step is to compare the debtor’s annual income to the median income of the state in which they reside.  The US Trustee website keeps track of government figures in this area.  The applicable state median income will go up or down depending on the size of the debtor’s family. 

Assuming that the debtor’s annual income is less than the state median income, the second step is to compute the debtor’s current monthly income.  Current monthly income is like a glimpse into the past in the sense that the debtor’s income for the six months prior to bankruptcy filing is averaged together.  Once the debtor’s current monthly income is calculated, the next step is to subtract a laundry list of expenses including such things as mortgage and car payments as well as particular allowed and allowable expenses. 

After expenses are subtracted from current monthly income, the resulting net total is the debtor’s disposable income.  A debtor’s disposable income is important because it measures the ability to repay creditors.  Disposable income is then multiplied by 60 to project how much disposable income the debtor will have over the next five years.   If, after the calculation is made, the total is greater than $10,950, a presumption of abuse arises.  On the other hand, the debtor “passes” the Mean’s Test if the number is less than $6,575.   If the amount is somewhere between $6,575 and $10,950, a presumption of abuse will arise if the amount exceeds 25% of a certain type of unsecured debt.

Even if the debtor does not “pass” the Mean’s Test, it may still  be able to file under Chapter 7.  This is because when Congress created the Mean’s Test, they provided a list of exceptions that may apply in an individual debtor’s case.  Therefore, Chapter 7 may be a viable option for someone considering filing for bankruptcy, despite potential bumps in the road that may come up when computing the Mean’s Test formula.