You might be surprised to hear a consumer bankruptcy lawyer say something positive about the Chapter 7 means test. After all, the test is an unnecessarily complicated scheme that pushes some middle-income people who need to file under Chapter 7 into Chapter 13. Nonetheless, there is one very good thing about the means test: most people do not have to take it. Who can avoid the means test?
If your income is below the state median, you need not take the means test.
To determine if your earnings are below the threshold for taking the test, compare your average monthly gross income for the six months prior to filing for bankruptcy to the state median for your family size. If your income is lower than the median, you can file under Chapter 7 without taking the bankruptcy means test. (You can find the current Pennsylvania median income figures here.) Because the state median income takes into account family size, it is not uncommon for debtors with relatively high incomes to avoid the test. For a more details on the means test and how it works, click here.
If the majority of your debt is business, tax, or other non-consumer debt, you can avoid the means test.
The means test applies solely to cases where the debts are primarily consumer debt. The Bankruptcy Code defines “consumer debt” as “debt incurred by an individual primarily for a personal, family, or household purpose.” (11 U.S.C. § 101) Business debts of most kinds, including business-related credit card charges, are not consumer debts under the code. Other non-consumer debts may include personal injury and other tort claims and taxes. Thus, if any of these non-consumer claims make up most of your debt, you need not take the test.
In the last two year, I have seen more and more cases in my Philadelphia area bankruptcy practice where the debtors have suffered the collapse of a business, leaving them with a mountain of business debt but virtually no consumer debt. In some cases, the debtors would not be able to avoid the bankruptcy means test without this exception.
If you are a member of the National Guard or Reserves who is on active duty, you are need not take the means test.
The National Guard and Reservists Debt Relief Act of 2008 exempts members of the National Guard and Reserves activated for 90 days or more from the test. For more details, see my post on bankruptcy and non-bankruptcy protections for service members and our military bankruptcy page.
If you are a disabled veteran, the bankruptcy means test is unnecessary.
If you receive Social Security (SSI or SSD), and your income without counting your Social Security is below the state median, you do not have to take the means test.
If you are a senior or disabled, it is important to note that Social Security benefits do not count as income on the test. (11 U.S.C.101(10A)(B)) For example, if you are a single person and have private retirement of $40,000 and social security of $12,000, you may file under Chapter 7 without taking the test, even though your combined income is above the Pennsylvania State median for a single person (currently $45,092). You qualify because only the private retirement income of $40,000 counts as income. So for the purposes of the Chapter 7 means test, your income is only $40,000 not $52,000.
Social Security income still counts as current income on your bankruptcy schedules. However, it is not generally a problem, unless your expenses are unusually low.
Bankruptcy Fact: There are additional federal protections that prevent most creditors from getting to Social Security income. (42 U.S.C. Section 407). Therefore, some seniors in financial difficulty can avoid bankruptcy. A good bankruptcy attorney will talk to you about all of your options, not just bankruptcy.
Although sometimes there is no way around taking the means test, more often than not one of the exceptions above will apply. However, if you have to take the bankruptcy means test, keep in mind that there is a high likelihood of passing and you may have options even if you do not pass.