Are You Eligible to File for Chapter 7 Bankruptcy?

All About the Bankruptcy Means Test

To determine whether your income is low enough for you to file for Chapter 7 bankruptcy in Ohio, use the bankruptcy “means test.” Designed to prevent high wage earners from filing for Chapter 7 bankruptcy, the means test is meant to channel some people into a Chapter 13 bankruptcy and require them to repay a portion of their debts.

You don’t necessarily need to be completely penniless to file for Chapter 7 bankruptcy. You may earn significant income and still qualify for a Chapter 7 filing if you have a lot of expenses, such as a high mortgage and auto loan payments, taxes, and other expenses (but they must be “reasonable”). Read on to determine if you pass the means test and are eligible to file Chapter 7 bankruptcy.

Why the Means Test?

The intent of the “means test” is to limit filing of Chapter 7 bankruptcy to individuals or families who cannot afford to repay their debts. The test works by deducting specific monthly expenses from your current monthly income to arrive at your monthly “disposable income.” Current monthly income is defined as your average income over the previous six calendar months before you file for bankruptcy.

Unfortunately, the higher your disposable income, the more likely you won’t be eligible to file Chapter 7. The laws require you, instead, to repay creditors usually through the filing of a Chapter 13 bankruptcy.

The first step of the means test is to figure out if your income is above or below the median income in Ohio. If you earn higher than the median income, you need to determine whether you would have enough funds left over, less certain expenses, to repay some of your debt

Is Your Income Above the State Median?

If your current monthly income is less than the median income for a household of your size in Ohio, you pass the means test. That’s it! You do not have to complete the rest of the means test. You may file for Chapter 7.

What About Your Disposable Income? Do You Have Enough to Repay Some Debts?

If your household income is higher than the state median, the computations for the means test get a bit more complicated. You have to determine if you have enough income left over after paying your allowed monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills, personal loans, or medical bills). If your disposable income exceeds a certain amount, you fail the means test and cannot get a discharge by filing Chapter 7.

Keep in mind that median income levels vary by state and by household size. Counties and metropolitan regions also may have different allowed amounts for expense categories, such as necessities, housing and transportation.

You can find the most recent family median income at the website of the U.S. Trustee at https://www.justice.gov/ust (select "Means Testing Information" and then choose the correct filing date from the drop-down menu.)

As you may have learned by now, bankruptcy can be a complex process. Although you can file yourself, you should take advantage of a free consultation with us to take a closer look at your situation.

If You Pass the Means Test

Merely passing the means test doesn’t automatically qualify you to file for Chapter 7 bankruptcy. The court also requires you to complete Schedule I: Your Income and Schedule J: Your Expenses. After deducting your actual monthly expenses from your current monthly income, and you have enough money left over to pay something to your creditors, the court might require you to convert or switch your Chapter 7 case to a Chapter 13 bankruptcy case.

Even if you qualify for Chapter 7 bankruptcy using the means test doesn’t necessarily mean you should file for it, only that you can. Filing bankruptcy is a major life-altering decision and should be made only after consulting an attorney.

What Happens If You Don’t Pass the Means Test

If you don’t qualify under the means test, your only alternative for bankruptcy is filing Chapter 13, and making monthly payments over a three- to five-year period following a budget monitored by a trustee. Chapter 7 is usually the most preferred type of bankruptcy filing because it requires no repayment. Chapter 13 bankruptcy is still the best (and usually only) method to deal with specific types of financial issues, such as catching up a mortgage default and keeping the home or repaying debts that won’t be eliminated by bankruptcy, such as back taxes or domestic support arrearages.