Bankruptcy laws enacted in 2005 required debtors to “pass” a means test before filing a Chapter 7 bankruptcy. The means test is based upon your family size, geographical location, and income as determined by standards set by the IRS.
The first part of the means test (currently Form 122A-1) looks solely upon the last six months of gross income prior to the date of filing. All income must be included. These six months of income are averaged and then calculated out to a yearly average. The yearly average is then compared to the standard for the same family size in your area as set by the IRS.
If your income is under the standard then you qualify (based on this test) to file a chapter 7 bankruptcy.
If your income is over the standard then you must do the second part of the test.
The second part of the means test (currently Form 122A-2) takes into consideration allowed expenses. These expenses include income taxes, health insurance, HSA payments, child support, family support, spousal support, union dues, out-of-pocket medical expenses, utilities, mortgage and rent payments, car payments and expenses, insurance, as well as charity expenses and certain school expenses. Most of these expenses are set by the IRS based once again on geographic location and family size. There are allowances if your expenses are different but generally the expenses are fairly realistic.
Once again if your expenses bring your average income below the median standard then you pass the means test and can file a chapter 7.
If your expenses don’t bring your income below the median then you are required to file a chapter 13. And the means test has calculated your disposable income that must be paid into the chapter 13 plan to your unsecured creditors.
There are of course fine tuning possibilities based upon your specific circumstances. But these are too specific for this discussion and you should discuss the issues with your attorney.
For current income standards and means testing figures check out the US Trustee website which has specific information on means testing as well as the US Trustee’s position on the means test.