Before 2005, Federal Bankruptcy Court Judges had a lot of discretion as to who could file for Chapter 7 Bankruptcy, based on the debtor’s individual circumstances. Then in 2005, with the enactment of the new bankruptcy laws, the Federal Government tightened up on the laws that determine who can file for Chapter 7 by creating a two part test, called the Means Test.

The first part of the Means test is simple. First, a formula is applied to exempt basic living expenses such as food, clothing, and housing. Then if the debtor is still able to pay off 25% of their debt after these expenses have been deducted from the debtor’s income, then the debtor will not be able to file for Chapter 7 Bankruptcy.

The second part of the means test is more complex. Here, the income of the debtor and his or her immediate family is compared with the median income for his or her state. The median income for each state is determined according to the information gathered in the last US census and how many people are in the debtor’s household. If the amount of the family’s income is greater than the median income for the state, then the debtor may be required to file for a Chapter 13 debt repayment plan.

If a debtor does not qualify for Chapter 7 under one of these two tests, then there is still a way to file. First, the debtor must show they are unable to pay their debts because of a special circumstance, usually defined as an involuntary debt or one that was otherwise out of the debtor’s control such as a sudden and serious illness or a call to active duty (absent a draft). Then the debtor must fulfill the procedural requirements by itemizing the additional expense/adjustment of income, providing supporting documentation, including a detailed explanation of the expenses or adjustments, how the expenses or adjustments were necessary and unavoidable, and attest under oath that what the debtor is reporting is accurate.

Therefore, anyone considering filing for Chapter 7 Bankruptcy should take a careful look at all of their circumstances and consider whether they qualify under the Means Test before filing. If you are having difficulties deciding if you qualify for chapter 7 bankruptcy under the Means Test.