If you are seeking to qualify for certain government assistance and/or Chapter 7 bankruptcy, you may have to pass something called a means test. In this article, we’ll define the term “means test” and explain how the Chapter 7 means test works.
A means test is a way of determining whether a person qualifies for a certain financial status. These tests look at the monetary resources a person has available to them and determine whether or not they are able to pay for certain things.
Means tests are commonly used to decide if a person qualifies for financial assistance such as welfare payments. If a person is determined to be able to pay for something such as food and/or healthcare on their own, they will not be given government assistance in paying for it. However, if it is determined that they do not have the means to pay for these goods and services independently, they may be eligible for assistance.
Another area where means tests are used is in bankruptcy law. The Chapter 7 means test is a formula used to determine if a debtor is eligible for Chapter 7 bankruptcy. If a debtor fails the means test, they must apply for Chapter 13 bankruptcy instead. The goal of the means test is to ensure that debtors who can afford to pay at least some of their debts do not abuse the system by filing for Chapter 7. As such, the means test aims to test a debtor’s ability to pay back their creditors.
The Chapter 7 means test has two steps.
The Census Bureau publishes the median income of all U.S. states and territories every year. If a debtor’s income of the past 6 months, not including the filing month, is lower than the median income in their state, they automatically pass the Chapter 7 means test.
If the debtor’s income is higher than the medium, they must move on to step 2 of the test.
In order to take step 2 of the means test, a debtor must record all of their expenses including food, healthcare costs, clothing, housing, utilities, and transportation.