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What is the means test?

The means test is a two-part evaluation related to a person's income that determines whether that person can file for Chapter 7 bankruptcy. The two-part test involves a comparison of the person's income to the state median. If the income is higher than that median, then the person must pass the second part of the test to be able to file for Chapter 7.

To compare the person or couple's income to the state median, the court looks at all the income received by the person or couple in the past six months. Income includes payment by employers, including commissions, tips, bonuses, regular salary or wages and overtime. Other types of income that must be claimed include rents and property income, dividends and royalties, interest payments, gross business income, retirement and pension payments, unemployment or workers' compensation, child or spousal support received on a regular basis and annuity payments.

Once all the income is totaled, it is averaged over six months. That average is compared to the state median income. If the person's income is less than that median, they may continue with a Chapter 7 filing. The same holds true if the income equals the median.

If the income is over that median, then the second part of the means test comes into play. The court takes the income and subtracts expenses allowed such as food and rent. That determines what is known as disposable income. If the court feels the disposable income is enough that the person can make some payments to unsecured creditors, then it will not allow the Chapter 7 filing. In these cases, individuals might be able to move forward with a Chapter 13 filing instead.

Source: FindLaw, "Who Can File for Chapter 7 Bankruptcy?," accessed Sep. 29, 2015

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