The means test is a financial evaluation process introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Its main purpose is to ensure that people who can afford to repay some of their debts don’t use Chapter 7 bankruptcy to avoid paying them entirely.
How does the test work?
The means test involves a two-step process:
- Step 1: Comparing your income to Oregon’s median income: First, you’ll need to calculate your average monthly income for the six months before filing for bankruptcy. If your income is below the median, you generally pass the means test and can file for Chapter 7. If it’s above the median, you’ll need to move on to the second step.
- Step 2: Detailed analysis of income and expenses: You need to complete a more detailed form (Official Form 122A-2) that calculates your disposable income. This can include housing costs, food and clothing, transportation, health care and taxes. If you have more than a specified amount left over after subtracting these allowed expenses from your income, the court may presume your case to be an “abuse” of Chapter 7.
Essentially, the means test acts like a gatekeeper. It aims to reserve Chapter 7 bankruptcy – which typically eliminates most debts – for those who truly can’t afford to pay their debts. If you have the means to repay some of your debts, the test steers you towards Chapter 13, where you’d set up a plan to pay back a portion of what you owe over time.
Are there any exemptions?
Yes, some people can file for Chapter 7 bankruptcy without taking the means test. You may qualify for an exemption if you:
- Owe primarily business-related debts rather than consumer debts
- Are a disabled veteran who incurred debts primarily during a period of active-duty military service or while performing homeland defense activities
- Serve as a member of the National Guard or a reserve component of the Armed Forces
Take note that these exemptions don’t automatically qualify you for Chapter 7 bankruptcy. They simply allow you to skip the means test when filing. The court will still review your case to prevent any abuse of the bankruptcy system.
Make the best decision for your financial future
The bankruptcy process can be complex, and the means test is just one part of it. Reach out to an attorney who can help you understand your options.
