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Overview of the Chapter 7 means test

On Behalf of | May 31, 2022 | blog, Chapter 7 Bankruptcy |

Tennessee consumers may file bankruptcy if they see no way to pay their debts. Many consumers choose Chapter 7, which requires selling assets. However, they must pass a means test to qualify.

How the means test works

Congress made the means test part of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 as part of reforming the process. The BAPCPA added the means test because too many high-earning consumers took advantage of Chapter 7 when they could pay debts.

It tightened the restrictions for Chapter 7 to encourage more consumers to file Chapter 13, which is a repayment plan. The test consists of two parts:

  • comparing the filer’s income to the median of the state for a similar household size
  • subtracting allowed expenses from six months of gross income

If the consumer does not exceed the state median, they pass the test and may file Chapter 7. A high-earner still has a chance if they have enough allowable expenses, such as housing, food, and transportation. If the court determines the filer has enough disposable income to pay some debts, they can not file chapter 7.

Exceptions to the means test

Since bankruptcy discharges personal consumer debt, filers with non-consumer debts of more than 50% of their total debt can commonly skip the means test. Money owed to vendors, taxes, vehicle loans for business purposes, or business-related personal guarantees often count as non-consumer debt.

Disabled veterans are often exempt if they accrued debt on active duty and have a minimum 30% disability rating. They are exempt if they received a discharge because of a disability occurring while in active service. Military reservists are given a temporary exemption if they got called to active service after September 11, 2001.

Consumers who don’t pass the means test could file for a Chapter 13, which is a repayment plan that allows debtors to repay debts over a period of three or five years. After plan completion, any remaining debt that is eligible for discharge will be discharged by the court.