When you file a Chapter 7 bankruptcy petition, the means test is applied to make sure that you really need to file bankruptcy and aren’t “abusing” the system. That might sound intimidating, but it’s a simple test, and the vast majority of debtors qualify for Chapter 7 bankruptcy.

The Chapter 7 means test focuses on two aspects of your income and expenses.

The first stage of the test compares your monthly income (as determined by a worksheet provided by the courts) to the median income for your area and household size. If your monthly income falls at or below the median, the means test is over—there is no presumption of abuse and you can file for Chapter 7 bankruptcy.

The median is determined by your geographic location and the size of your family. Depending on your state, the 2004 median income for a family of four ranged from $47,256 to $88,401.

If your income exceeds the state median, it doesn’t necessarily mean that you can’t file under Chapter 7. Instead, it triggers the second phase of the test. During the second step, allowable expenses are deducted from your monthly income based on IRS standards. The amount that’s left over after those allowable expenses is your disposable income. That number is multiplied by 60 to determine how much disposable income you’ll have over the next five years.

If that total is less than $6000, the means test is over—there is no presumption of abuse and you can file bankruptcy under Chapter 7. If the total is more than $10,000, there is a presumption of abuse. You will have the opportunity to include additional necessary expenses that reduce your monthly income.

If the total disposable income for the five year period falls between $6000 and $10,000, then a third analysis applies. Here, your expected disposable income over the next five years—that number between $6000 and $10,000—is compared to the total of your non-priority unsecured debts.

If your disposable income is less than 25% of the total of those debts, the presumption does not arise. In this case, also, you will have the opportunity to show special circumstances that justify the inclusion of additional expenses.

In short, the means test works like this:

  1. Compare your monthly income to the state median:

    1. If your income is at or below the state median, the presumption does not arise and you “pass” the means test;
    2. If your income is above the state median, go on to calculate your disposable income for the upcoming five year period.

  2. Calculate your disposable income over the upcoming five years:

    1. If that number is below $6000, the presumption does not arise and you “pass” the means test;
    2. If that number is above $10,000, the presumption does arise, and you can file under Chapter 7 only with a showing of special circumstances;
    3. If that number is between $6000 and $10,000, calculate 25% of your outstanding unsecured, non-priority debts.

  3. Multiply your outstanding unsecured, non-priority debts by .25:

    1. If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts, the presumption arises and you can file under Chapter 7 only with a showing of special circumstances;
    2. If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts, you “pass” the means test and can file under Chapter 7.

Be away, however, that even if you’ve “passed” the means test, the trustee can still raise the issue of abuse if circumstances of a particular case warrant it. Your bankruptcy attorney will be able to tell you what sort of circumstances might trigger a challenge from the trustee