Are You Exempt from the Chapter 7 “Means Test”?

Nearly all debtors who file for Chapter 7 bankruptcy have to pass the “means test” which determines whether or not they are eligible for this type of bankruptcy. There are some instances, however, when a debtor may bypass the test and still file successfully.

The means test was added to Chapter 7 bankruptcy eligibility requirements in 2005. Its purpose is to keep higher-income debtors from qualifying for Chapter 7, forcing them to repay a portion of their debt in a Chapter 13 bankruptcy instead.

If your income is lower than the state median, you will generally qualify for Chapter 7. If it is higher, you typically have to pass the means test, which will compare your income to certain allowed expenses to determine if you can repay part of your unsecured debt. Being exempt from the means test makes your income level and its relation to your expenses a non-issue.

There are three scenarios that exempt you from needing to pass the means test in order to file for Chapter 7 bankruptcy.

  • The majority of your debts are not consumer-related. You are excused from the means test if more than 50% of your debts are non-consumer ones. These are general business-related debts, incurred while you were seeking a business livelihood. Some courts consider personal income tax debt to be in this category too.
  • You are a disabled veteran. If you are a disabled U.S. Armed Forces veteran and incurred your debts mainly while you were on active duty or participating in homeland defense, you are exempt from passing the means test. To qualify, your disability rating must be at least 30%.
  • You are a military reservist or member of the National Guard. Members of the military reserve or National Guard do not have to pass the means test throughout their term of active duty and for the following 540 days, as long as they were either on active duty or participating in homeland defense for a minimum of 90 days. But once the exemption period is over, you will have to pass the means test if the time for objection to the means test qualification has not passed.

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