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What is the Means Test?

Back in 2005, Congress in all their wisdom passed the current bankruptcy code, which added several documents to the standard bankruptcy petition, including a “Means Test”. The addition of the Means Test promised to reduce abuse of the bankruptcy code (even though there was no evidence of such). The code was bought, paid for, and written by the creditor lobby. It’s widely regarded as some of the worst laws written. But I digress…

If your income is low enough, you are probably eligible to file a Chapter 7 case. If your income is too high, you may or may not be able to file a Chapter 7 case. To determine where your income falls, we look at your actual income for the last 6 months and compare it against the median income for Arizona (or wherever you live) for your household size. If your income is below the median income, congratulation! You are eligible for a Chapter 7 case! If your income is higher than the median income, further calculations are necessary—the Means Test. We use your gross income (and your spouse’s income, if you’ve got one) for the last 6 months, double it, and call that your annual income. We take that figure and compare it with the median income of a household with the same number of people.

For the number of people in the household, we count “heads on beds”. Included, of course, are your spouse and your kids if they live with you. If your nephew lives in the house and you support him, he’s a household member. If your parents live in the house, they are a member of the household in most instances. If your significant other resides in the house, and you share expenses, they are a member of the household.

Here are the current (2021) means test numbers for Arizona:

Household size

Annual Income

Monthly Income

1 person

$ 55,839

$ 4,653

2 people

$ 69,975

$ 5,831

3 people

$ 75,560

$ 6,297

4 people

$ 85,714

$ 7,143

5 people

$ 94,714

$ 7,893

Add $9,000 for every additional person

Let’s suppose that husband George and wife Georgette together made $39,000 over the last 6 months. Their annual household income for means test purposes is twice that -- $78,000. George and Georgette have two kids at home, making them a household of 4. So, we take their annual gross household income and compare it against the median income for a household of 4 in Maricopa County, which at the time of this writing is $85,714. George and Georgette’s income comes in below that figure, making the means test unnecessary. They can file a Chapter 7 bankruptcy case with “no presumption of abuse” of the bankruptcy code.

Now, let’s change it up a little and suppose that George and Georgette are doing slightly better income-wise, and that their joint income for the last 6 months is actually $48,000, which we annualize to $96,000, which is more than the current median income in Maricopa County ($85,714, remember?). Because their income is above the median income, we must do the means test to determine whether there is “a presumption of abuse of the bankruptcy code”. This involves using actual income, less deductions for allowable expenses, according to IRS national and local standards. Oftentimes we are able to squeeze an “above-median” filer into a Chapter 7, but if not, Chapter 13 is the bankruptcy alternative.

Expenses that may reduce income enough to squeeze into a Chapter 7 include taxes (both current and past-due), child support, child care, medical expenses, car loans, mortgages, and insurance, among others.

If your debt is mostly non-consumer debt, meaning that over 50% of your debt consists of business debt, taxes, student loans, or other non-consumer debt, you are exempt from the means test.