Avoiding the Bankruptcy Means Test

Last updated:
February 10, 2019

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 before 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 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.

I see many 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.

The Bankruptcy Code exempts disabled vets from the test. For a more detailed explanation, click here.

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 means test. (11 U.S.C.101(10A)(B)) For example, suppose you are a single person and have a private retirement of $40,000 and social security of $12,000. In that case, 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 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.

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About this Blog

Philadelphia Bankruptcy Attorney is published by Harborstone Law. Harborstone Law represents clients in bankruptcy and debt relief cases throughout Philadelphia and the surrounding Pennsylvania counties.

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Dan Mueller is a bankruptcy attorney and partner at Philadelphia-based Harborstone Law. Dan helps people and small businesses resolve serious financial and legal issue through bankruptcy and non-bankruptcy debt solutions.
Paul Midzak focuses his practice on debtor defense, dispute resolution, consumer protection law, and Chapter 7 and Chapter 13 bankruptcy. He also advises businesses on a variety of legal matters.
Harborstone Law represents clients in bankruptcy, debt, consumer, and small business matters throughout Philadelphia, Montgomery, Delaware, Chester, Bucks, Berks, Lancaster, Lehigh, and Northampton Counties in Pennsylvania.

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