Everything you need to know about the means test

Congress added the means test in 2005 to steer people who could afford to repay some of their debts into Chapter 13. It's done on official court forms, and your attorney or filing service will usually handle the math.

Compare your income with your state's median

First, figure out your "current monthly income." That's your average gross monthly income over the six full calendar months before you file. It includes wages, self-employment income, rental income, pensions, and regular help from family members. Social Security benefits are not counted.

Next, multiply that average by 12 and compare it with the median income for a household your size in your state. The U.S. Trustee Program publishes these figures and updates them regularly.

If you're below the median, you pass. You can file Chapter 7 and don't need to do the second step.

Here's a simple example. Say you live with two children, and your average monthly income over the last six months was $4,500. That's $54,000 a year. If the median for a three-person household in your state is $80,000, you pass easily.

Why does the six-month window matter?

Because the test looks backward, income over the last few months can change the result. If you lost a job three months ago, your six-month average includes three months of paychecks and three months with little or no income. Waiting a month or two to file could lower your average.

The opposite is also true. A recent raise or a large bonus can push your average up. An attorney can help you pick the right time to file.

Subtract allowed expenses

If your income is above the median, you move on to a longer calculation. This step subtracts certain monthly expenses from your income to find your "disposable income," the amount left that could go toward your debts.

Some expenses use national and local standards set by the IRS, like food, clothing, housing, utilities, and transportation. Others use what you actually pay, including taxes, health insurance, child care, and court-ordered support. Payments on secured debts, like a mortgage or car loan, are also subtracted.

How it’s added up

After expenses, the court looks at how much you'd have left over five years.

• Less than $10,275? You pass.
• Over $17,150? You fail.
• In between? It depends on how much unsecured debt you have. If that leftover amount could repay at least 25% of your unsecured debts, you fail. If not, you pass.

These amounts are adjusted every three years.

What if you fail?

Most people who fail file Chapter 13, which lets you keep your property and repay part of your debts over three to five years. In some cases, you can argue that "special circumstances" like a serious medical condition should let you pass.

Who doesn't have to take it?

You can skip the means test if most of your debt comes from running a business rather than from personal spending. Certain disabled veterans with debts from active duty are also exempt, as are some National Guard members and reservists.

What it means

If your income is modest or has recently dropped, there's a good chance you'll pass.