The bankruptcy means test is basically a tool to figure out if someone can file for Chapter 7 bankruptcy, which wipes out most of their debts, or if they have enough income to pay back their debts under a Chapter 13 plan. Think of it as a “can you really afford to pay your debts?” test. It was created as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Why? Because lawmakers believed that too many folks were taking advantage of Chapter 7 to dodge debts they could actually afford to pay. The means test was introduced to ensure only those truly in need could use Chapter 7, while others would go into Chapter 13 and pay back at least some of what they owed.
As for whether the means test solved an actual problem, that’s debated. Critics argue that the perceived “abuse” of Chapter 7 was overblown and that the means test made the bankruptcy process more complicated and expensive for debtors. Some studies have shown that the majority of people who file for bankruptcy genuinely need relief, regardless of the means test. Others believe it did help curb potential abuses by ensuring that those with higher incomes repay some or all of their debts. The effectiveness and fairness of the means test remain topics of discussion among legal and economic professionals.
The Median Income Test
The state median income plays a crucial role in the means test calculation for bankruptcy. Here’s how it works in a nutshell:
- Comparison with State Median Income: First, you’ll compare your monthly income (averaged over the last six months) to your state’s median income for a household of your size.
- Below the Median: If your income is below the state median, bingo! You’re typically eligible to file for Chapter 7 bankruptcy without further analysis.
- Above the Median: If your income exceeds the state median, you’ll need to complete the rest of the means test to determine eligibility for Chapter 7. This involves deducting specified monthly expenses from your current monthly income to determine your “disposable income.”
- Disposable Income: If after these deductions, you have enough disposable income to repay some of your unsecured debts, you may not qualify for Chapter 7 and might be pushed into a Chapter 13 repayment plan.
The state median income figures ensure that the means test takes into account the cost of living in different states, acknowledging that what’s considered a high income in one state might be just average in another.
The map below shows the median income levels for a four person household in each state. Every state to show the median income for household sizes one through four. You can click on any of those numbers to go straight to the means test calculator on LegalConsumer.com for that state.
These numbers are updated twice a year by the Justice Department.
They have been incorporated into the Free Online Means Test Calculator on LegalConsumer.com
Some states saw a significant drop since the previous median income figures, released in April 2023