How Is Income Calculated for the Chapter 7 Bankruptcy Means Test?

Every debt relief tool has to meet certain requirements. For a bankruptcy discharge under Chapter 7, then you need to meet requirements based on your income. To make the bankruptcy discharge fair, the US Congress passed a test, which is known as the means test. These changes were made in 2005. When you “pass” the means test, it qualifies you for a bankruptcy discharge under Chapter 7 bankruptcy.

Let’s cover the bankruptcy means test anyhow income is calculated.

How Does the Means Test Work?

The Chapter 7 means test is a bankruptcy form you’ll have to complete and fill for your bankruptcy petition. This form is designed to calculate your monthly income taken as an average. You would take that average income and multiple it by 12 to calculate your annual income.
Your means test is done in relation to the number of people in your household. As such, you’ll have to include the income of your spouse even if he/she is not filing for bankruptcy discharge.

The reason why it’s sacrosanct that you use income generated as a household while calculating a Means Test is due to the fact that a comparison is done between your average household income and the average household median income based on household size in your state. The figures of the average household income according to family size is done by the census data. For example, In plainer terms, this test checks whether your household income is below or above your state’s average household income.

Where to Get a Chapter 7 Means Test Form

If you’ve finally made up your mind to file for a Chapter 7 bankruptcy discharge, one of the foundational steps to take include downloading the means test. You can get a copy at the US Courts UST website. However, there is a gamut of other information you need to complete the form.

How Do You Calculate Your Income for The Means Test?

You need the bankruptcy means test, but before calculating it, you should know your monthly income currently. This monthly income is the sum of income you’ve received in the past six months prior to filing for a bankruptcy discharge. The calculation is the same for the Chapter 7 and Chapter 13 bankruptcy. When you file for a bankruptcy discharge on the 7th of May, your CMI is calculated according to the income earned during November through the end of April, representing six months before filing for bankruptcy.

Have it at the back of your mind that the law requires that you report the sum of your household income. As such, it’s compulsory for you to include your spouse's income, even if they’re not filing for a bankruptcy discharge.

Some income that you’re mandated to include in the test include the following;
  • Overtime
  • Salaries
  • Commission
  • Income from 1099
  • Wages
  • Bonuses
  • Annuity Payments
  • Workers’ Compensation Benefits
  • Unemployment Compensation
  • Pensions and Income from retirement savings
  • Royalties, Dividends, and Interest
Social security income is not considered income for the means test. To sum up your monthly income, calculate the addition of your income within the past six months right before applying for a bankruptcy discharge, then divide the figure by six. You’re expected to use the gross income before any deductions are made. The only exception here is for your business income and your rental income.

Also, you shouldn’t include income gotten via the SSA (These include retirement from Social Security, SSI, and SSDI) as your Means Test monthly income. But this income should be added to your bankruptcy discharge form.

Are there any tips that help pass the means test?

You are checking to see if your income is below the income limit for Chapter 7. You’ll have to multiply your current monthly income by 12 when calculating the mean annual income. You’ll then compare this mean income to the average for your state. The annual income that falls below the given median income for the state automatically qualifies for a bankruptcy discharge. However, if your income is above median income guidelines for the state, then you’ll have to sit for another test to keep your chances of qualifying for a bankruptcy discharge alive.
If you want a seamless way of calculating a median income, then I’ll encourage you to use Ascend’s Median means test calculator.

As for the second part of the test, you can get your income that is disposable by calculating your allowable monthly expense and deducting it from your CMI. Your income that is disposable is what’s remaining after deducting the expenses needed to repay your debts. In an instance where disposable income is less than a certain figure, chances are high that you’ll qualify to file under a Chapter 7 bankruptcy.

Deductible Expenses

Your means test allows you to deduct some expenses before calculating the mean test. Some noteworthy examples of those expenses include the following;
  • Your income tax
  • Premiums from Life insurance
  • Child support and alimony
  • Charitable donations
  • Expenses on your child
  • Union dues, uniforms and other mandatory employment deductions.
You might also be allowed to deduct certain expenses. However, you may be required to provide evidence for the expense you’re claiming. Additionally, it’s not all types of living expenses that you’re allowed to deduct.

Some expenses that fit into the term of deductible living expenses are;
  • Money spent on food
  • Expenses on house keeping supplies
  • Clothing expenses
  • Money spent on transportation
  • Housing
  • Products and services related to personal care
There are limitations on the expenses described above. It’s imperative that you check for the maximum amount of deductible you’re allowed to make while filing for a Chapter 7 bankruptcy discharge.

Can You Estimate if I Can Qualify for Bankruptcy Based on the Means Test?

The Internet is filled with a gamut of Means Test calculators. These calculators give you room to estimate if you’re allowed to qualify for a Chapter 7 bankruptcy discharge or not. Ascend has a free and intuitive Chapter 7 Means Test Calculator. Feel free to make use of this calculator in estimating if you can qualify for the Means Test or not. You can also look at bankruptcy alternatives if Chapter 7 bankruptcy is not the best option for you. 

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Posted - 12/02/2021