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What is the means test and how does it work?

The bankruptcy means test is a two-step process to determine whether a person qualifies to file for Chapter 7 bankruptcy. The test assesses income, expenses and household size to gauge whether someone has enough disposable income to pay their debts.

While the means test was constructed to restrict the volume of people who can benefit from Chapter 7, the vast majority of those with overwhelming debts have no problem qualifying. Those who don’t meet the requirements can still opt for Chapter 13 bankruptcy.

Step 1: Income limits

The first part of the means test looks at household income levels based on annual earnings. In 2020, Texas’ median income levels are:

  • 1-person household: $50,902.00
  • 2-person household: $66,899.00
  • 3-person household: $73,948.00
  • 4-person household: $86,259.00

Start by adding all income over the past six months and multiply by two. If you are under the median income level, you’ve passed the test and can file for Chapter 7. Nearly 90% of debtors, on average, qualify after this step.

Step 2: Deduct expenses from income

For those who did not qualify for Chapter 7 based strictly on median income levels, or those wanting to file for Chapter 13, a second step is available. You start by gathering all expenses from the past six months, such as rent, medical costs, clothing, groceries and others deemed as “allowable expenses.”

That amount is subtracted from your income to determine “disposable income,” which can go toward paying off their debts. If that amount meets the requirements, you may still qualify for Chapter 7. It’s crucial to be thorough and include every allowed expense, and avoid mistakes, such as duplicating information, which can cause your case to be dismissed.

Next steps for a better financial future

Once you pass the means test, an experienced bankruptcy attorney will help you navigate the complicated filing process for Chapter 7 bankruptcy. A knowledgeable attorney also understands when a better result may be achieved through Chapter 13.

If you fail a means test, there is no appeal. However, you can retake the test after six months, so your current financial situation is addressed. Bankruptcies are expected to rise in 2021 as many people face overwhelming challenges resulting from the pandemic. Your lawyer understands these hardships and will work diligently to help you regain your financial freedom.