Bankruptcy is a powerful tool that can allow businesses and individuals to discharge a substantial amount of their debts. As such, the bankruptcy courts are very careful to prevent the abuse of the bankruptcy system by subjecting petitioners under Chapter 7 with primarily consumer debt to a means test to determine if they truly need bankruptcy to restore their financial lives. When a petitioner fails the means test, the court presumes they are abusing the bankruptcy system — unless they can show special circumstances — and usually dismisses the petition or converts it to Chapter 11 or Chapter 13 proceeding.
In applying the means test, the court first considers whether your current monthly income — which is the average of your last six month’s income — is less than the medium income for a similar household in your state. The United States Census Bureau.
If you do not pass the first step of the means test, it does not mean you don’t qualify. At the second step, the court examines your disposable income, which is your income minus certain allowable expenses. The court then compares your disposable income calculated over five years to the amount of unsecured debt for which you are seeking a discharge, as well as some other statutorily established benchmark numbers, to determine if your debt and income justifies a discharge under Chapter 7.