Chapter 7 Means Test – What Does It Really Mean?

The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), passed in 2005, included several major changes to the United States Bankruptcy Code. One of the most important changes made is a “means test” which makes it more difficult for individuals to have their debts discharged in a Chapter 7. If the debtor’s income is above the median income for their state they must pass this “means test” in order to file Chapter 7 Bankruptcy.

Debtors who fail the means test may not be allowed to file Chapter 7 Bankruptcy, but instead, may be allowed to file a Chapter 13 depending on their disposable income and repay a portion of their debt over a three to five year period under a Chapter 13 plan or repayment schedule.  If the debtor(s) total monthly income for that household size is under the median for that State they qualify for a Chapter 7 bankruptcy and can proceed that way. Reviewing the debtors monthly income is the average received by the debtor for the prior 6 months before filing the bankruptcy case. The means test takes the debtors total monthly income and lowers it by certain deductions outlined by the IRS. The goal of this test is to see if the debtors have enough disposable income (income left over) to pay back their creditors.

Some consumers that are contemplating filing bankruptcy around tax time wonder if their refund would be added income to the means test. This is a tricky question and should be answered by an experienced bankruptcy attorney. However, most bankruptcy courts do not consider income tax refund as additional income. This does vary from court to court. The bankruptcy courts are given some leeway on this issue.  If the trustee handling the bankruptcy case decides a certain portion of the tax refund is new income affecting the means test then it is up to the filer (or his/her attorney) to file a motion for the bankruptcy court to rule on the issue by the Bankruptcy Court Judge. The result of the court ruling could actually move you into a Chapter 13  in lieu of a Chapter 7 because of the additional income. Unless the filer is above the median income many courts will not take the tax refund into consideration on the means test.

As you are aware this is tax season. If you are thinking about filing a Chapter 7 bankruptcy, consult with a good, experienced and affordable bankruptcy attorney to get the facts so you do not have any surprises when in bankruptcy court.