What Are the Chapter 7 Bankruptcy Income Limits?

The Chapter 7 Bankruptcy Income Limits: What Is the Bankruptcy Means Test?

Income limits are closely tied to the means test. The means test is a calculation that helps determine who’s eligible to file Chapter 7 bankruptcy. The goal of the means test is to prevent anyone who has the means or ability to repay their debt from participating in Chapter 7. If the test determines that you have the means to repay at least some of your debt, you may be eligible for Chapter 13 bankruptcy instead.

The bankruptcy means test is a calculation laid out in the Bankruptcy Code. The starting point for this calculation is your state’s median household income.

How Do You Pass the Means Test? 

If your household income falls below the median for a household of your size in your state, you're under the income limit. This means you meet the criteria for the Chapter 7 means test, making you eligible for Chapter 7 bankruptcy.

If your household earns more than the state's median for your family size, you might still be eligible for Chapter 7 bankruptcy. This can happen if, after accounting for your expenses as calculated by the means test, you have no disposable income left. Let's dive deeper into how the means test works.

Means Test Part 1: How To Calculate Your Annual Income Under the Means Test

The first part of the means test compares your average income to the median household income for the same household size in your state. The income limit for your state and household size is based on data from the Census Bureau, and it changes multiple times per year.

To find the most up-to-date information, go to the means testing page from the United States Trustee (UST) and choose the current option in the drop-down menu titled “Data Required for Completing the 122A Forms and the 122C Forms.” 

This will bring you to a new page on the Justice Department’s website that provides a link titled “Median Family Income Based on State/Territory and Family Size,” provided by the Census Bureau. From there, you can pull up a table showing median incomes by household size for each state.

Step 1: Calculate Your Current Monthly Income for the Means Test

Under the means test, your monthly income is based on what you made in the six months before your bankruptcy filing. This doesn’t include the month your bankruptcy case is filed in. For example, if you file for Chapter 7 bankruptcy in July, calculate your current monthly income based on how much you earned from January 1 to June 30. 

To calculate your monthly income, add up all the gross income you received in the relevant six-month period. Gross income is the amount you make before taxes and other deductions are taken out. 

Include income from wages, alimony, child support, rental income, and any other money you receive on a regular basis. It doesn’t include Social Security income (SSI or SSDI). If your only source of household income is SSI or SSDI, you pass the Chapter 7 means test without having to do any math. 

Step 2: Divide the Result by Six

Next, divide your gross income by six. The result is your “current monthly income” under the bankruptcy means test. 

If you received significant overtime pay, income from extra gigs, or a bonus during the six months, your average monthly income may be higher than what you’re actually earning now. Similarly, if you were out of work for four out of the last six months before finding a new job, your average income under the means test may be much lower than what you’re making now.  

Step 3: Use Your Current Monthly Income To Determine Your Annual Income

To figure out your annual income under the means test, take your current monthly income and multiply it by 12. Compare that number to the annual income for your household size in your state. 

If your annual income is less than the median, you pass the Chapter 7 means test. If your income is greater than the median household income, you’ve failed the first part of the means test. But you may still be eligible to file Chapter 7 bankruptcy based on the second part of the means test.

Means Test Part 2: Account for Your Household Expenses

The purpose of this part of the test is to determine whether your income is enough to cover your living expenses and repayment of your debts. 

When you subtract your allowed living expenses from your monthly income, if the number is negative you don’t exceed the Chapter 7 income limits. You pass the means test and can proceed with filing for bankruptcy relief under Chapter 7. 

If the number is positive, the bankruptcy court may determine that you have enough disposable income to repay at least part of your debts. This means you may have to file  Chapter 13 bankruptcy instead. 

What Expenses Are Considered in the Means Test?

Since only some types of monthly expenses are considered expenses in the means test, this can get very technical. If you make it to this point, consider hiring a bankruptcy lawyer to help you. Many offer free consultations, which may be all you need to see if you qualify for Chapter 7.

How Do Past Expenses Factor Into the Means Test?

Your average monthly income is calculated by looking at the past. Your expenses, on the other hand, are forward-looking and based on your actual monthly expenses. If your old healthcare plan cost $600/month but you were able to switch to a cheaper plan for $300/month, the means test calculation will show this as a $300 monthly expense. 

Examples of allowable monthly expenses includes:

• Paycheck deductions for income taxes, Social Security, health insurance, life insurance, retirement contributions, union dues, etc.

• Regular living expenses, which are based on local or national standards which vary by household size

• On-going debt payments, such as a car loan or mortgage payment

• Actual necessary expenses that aren’t included in the regular living expenses

Actual necessary expenses are expenses that you actually pay every month that aren’t already accounted for in the local or national standards. If the United States Trustee in your district picks your case for an audit, you’ll be required to show documentation that you’re making these monthly payments. 

They include the following: 

• Term life insurance for yourself

• Education for employment that is a condition of your employment

• Expenses incurred for the health or welfare of physically or mentally challenged child

• Childcare expenses, like babysitting, daycare, and preschool

• Medical bills exceeding the national standards for healthcare expenses

• Certain insurance premiums

• Charitable contributions (up to 15% of gross income) 

What Happens if I ‘Fail’ the Means Test?

If the means test shows that your income is greater than the allowed expenses, you may not be eligible to file Chapter 7 bankruptcy. If your income has been higher than usual in the past six months or your expenses are lower than usual, it might just be a timing issue. If so, you can consider filing for Chapter 7 later. 

If you expect to continue to have disposable income, you probably want to look into Chapter 13 or other debt-relief options instead.

Are the Chapter 7 Bankruptcy Income Limits the Same for Everyone?

No. If the majority of your debt is business debt or if you’re part of the military, you may be exempt from the Chapter 7 income limits.

Exemption for Business Debt

If more than 50% of your debt is considered non-consumer debt, you’re automatically exempt from the means test calculation. 

Non-consumer debt is also called business debt because it’s incurred with a business or profit motive. If you’re not sure if you have business debt, consider speaking to a bankruptcy attorney about your situation and the types of debt you have. 

Exemption for Qualifying Service Members and Veterans

Disabled veterans, reservists called to active duty, and members of the National Guard don't have to count compensation connected to their service as part of the bankruptcy means test. This protection was recently expanded when Congress passed the HAVEN Act.

Anyone who qualifies for one of these exceptions to the bankruptcy income limits has to file a Statement of Exemption from Presumption of Abuse Under § 707(b)(2) instead of their bankruptcy means test form. This form lets the bankruptcy court know that you’re not subject to the income limits. 

Let’s Summarize…

The means test is one of the most complicated parts of the bankruptcy law. If it shows that your household income is less than the state median household where you live, you pass the Chapter 7 means test. If your average income exceeds the median income, you may still be eligible for Chapter 7 bankruptcy if your income is less than your allowable expenses.

Upsolve can help you do the means test calculation and prepare your bankruptcy forms for free. Take our five-minute screener to see if you’re eligible to use our web app. It’s completely free and has already helped over 13,000 people file Chapter 7 bankruptcy without a lawyer. 

Check out the video below ⬇️ for more!