What Is the Chapter 7 Means Test?

If you are considering filing Chapter 7 bankruptcy, which discharges debt, you must prove that you don’t have the means to pay back your debt. And you prove that by taking a means test.

To be eligible for Chapter 7, you must show that your income is too low (and in some cases your expenses too high) for you to pay off your debt. Under federal law, this is determined by the means test, which uses the filer’s state median income — the median income for a family of the same size in your state — as a point of comparison. The U.S. Census Bureau publishes an updated table of median incomes by state every year. You’ll pass the test as long as your income doesn’t exceed the state median income.

In New Jersey, the current median income for a family of three is $103,634. So if you earn $80,000 and have a spouse and one child, you qualify for Chapter 7 bankruptcy. Note that although the means test uses annual median income as the income criteria, the law requires that filers base their income on what they’ve earned over the previous six months. That means you may be better off waiting another month or two if you have recently lost a job or earn less than you did previously for your income to fall below the state median income threshold.

To calculate your annual income, you should include your gross income from the past six months, such as wages, rental income, unemployment benefits, business income, and alimony or child support payments. Divide the total by six to find your current monthly income and then multiply that number by 12 to obtain your annual income. That’s the amount that must fall below the New Jersey median income.

If your income is greater than the state median income for a household of your size, you may still qualify for Chapter 7 by deducting allowed expenses such as housing costs, utilities, childcare, taxes and insurance. If after these deductions you have no disposable income available to pay back debt, you will qualify to receive a Chapter 7 discharge. If not, you may need to consider filing Chapter 13.

In either case, these calculations can become complicated, which is one of many good reasons to consult an experienced New Jersey bankruptcy lawyer. The Law Offices of James C. Zimmermann has assisted New Jerseyans in obtaining debt relief through bankruptcy for more than 25 years. To find out if you can pass the means test to qualify for Chapter 7, call us at 973-764-1633 or contact us online. We have offices conveniently located in Vernon, Wayne, Pompton Lakes, Hackensack and Nutley, New Jersey.