Individuals whose debts are primarily consumer debts are subject to a “means test” designed to determine whether a bankruptcy case
should be permitted to proceed under Chapter 7.
The first part of the means test looks only at income. It compares the debtor's household
income for the six months before bankruptcy to the median income for the state of residence and family size. If household income is
less than the median, the means test is satisfied and the debtor can file Chapter 7.
Generally, income for the means test includes
wages, salary, and commissions (before deductions for taxes or insurance). If the debtor is a business owner, income also
includes the net profits from the business but not net losses.
In California, the median monthly income ranges from $4,715
for one person, to $6,277 for a couple, and to $7,875 for a family of four (as of November 2018).
The second part of the means test
looks at household expenses. It compares the debtor's household income for the six months before bankruptcy to household expenses.
Many expenses are subject to a cap based on national or regional averages calculated by the IRS. But a few of the most important expenses
-- such as monthly payments on a home loan or a car loan -- are based on what the debtor actually pays. If allowable household expenses
exceed income, the means test is satisfied and the debtor can file Chapter 7.
The third part of the means test looks at ability to
repay creditors. It compares disposable income (income less allowable household expenses) to debts. If income is above the median
but only slightly higher than allowable expenses, and the debtor has substantial unsecured debts, it may still be possible to file
Individuals should discuss the means test with an attorney if (1) household income is close to the median, (2) household
income has changed substantially in the last six months or varies substantially from month to month, (3) household income is not just
wages or salary, or (4) the third part of the means test might apply.
The means test does not apply to individuals whose debts are
primarily non-consumer debts. Most often, these individuals operate a business, have investment real property, or do not own a home.
Law Office of
Stephen K. Haynes