Chapter 7: Eligibility And The Means Test

In 2005, significant changes to the U.S. Bankruptcy Code were made to reduce the number of people eligible to file for Chapter 7 bankruptcy, the most commonly filed form of debt relief.

Part of the reasoning behind the legislative change was the belief that too many people were using Chapter 7 to obtain easy or fraudulent discharge of their debt.

To address that concern, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) instituted an income eligibility test for filing Chapter 7 bankruptcy called the means test. Understanding the means test is critical to knowing whether you can file for Chapter 7, a liquidation bankruptcy.

In many cases, consumers who formerly qualified for Chapter 7 can no longer do so and must consider Chapter 13 bankruptcy, which offers debt reduction but also requires a three- to five- year repayment plan.

Here are some important points about the bankruptcy means test:

• If your average income for the last six months falls below the median income in New York for a similarly sized household, you may qualify for Chapter 7 bankruptcy.
• If your income is higher than the median New York income, an additional calculation considers your income minus standard living expenses to determine your projected income over a five-year period. If that income is over a certain amount, eligibility for Chapter 7 is denied.
• The standard living expenses you can deduct may be predetermined based on schedules developed by the Internal Revenue Service (IRS).

The means test is complicated and specific to your individual income picture. Work with an experienced New York bankruptcy attorney to help you understand bankruptcy options open to you.