Navigating Bankruptcy: Means Testing and Alternatives

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Understanding Bankruptcy Means Testing

A means test is essential for bankruptcy applicants earning more than the median income in their communities. This test ensures that applicants repay their creditors fully or partially if they can afford it. Those who cannot afford repayment installments may qualify for Chapter 7 bankruptcy, which discharges most debts but may require forfeiture of significant assets. Conversely, individuals who can make some payments to creditors are eligible for Chapter 13 bankruptcy, with means testing determining the payment amount and term length.

How Does Bankruptcy Means Testing Work?

Bankruptcy means testing evaluates your ability to afford basic necessities like food, clothing, transportation, and healthcare in your community. It compares your monthly income and expenses with the typical household costs in your area. You must look up median costs for your community and include them in the means-testing worksheet, along with your actual expenses. This information is available online from federal government agencies.

If means testing is required, completed forms must be submitted to the court within 14 days of opening your case. Including these forms with your bankruptcy filing is advisable. Consult with your bankruptcy attorney about the timing of your means-testing submissions.

Chapter 7 Bankruptcy

All Chapter 7 filers must complete Form 122A-1, a statement of monthly income reflecting all sources of income for the six months preceding the bankruptcy filing. If your average income is less than your state’s median income for a household of your size, your Chapter 7 case can proceed. If your income exceeds the median, you must refute the presumption of abuse to continue with Chapter 7.

You may do so by completing one of two additional forms:

• Form 122A-1Supp: This form asks about the nature of your debts and potential exemptions due to military service.
• Form 122A-2: If not exempted using Form 122A-1Supp, this form determines whether your income is sufficient to offer creditors repayment under a Chapter 13 repayment plan.

Chapter 13 Bankruptcy

If you file for Chapter 13 bankruptcy, you must complete Form 122C-1, which characterizes the average monthly income earned in the six months preceding your bankruptcy filing. If your income is equal to or less than the median income for your community, the repayment period is set at three years. If your income exceeds the median, you must fill out Form 122C-B to determine the amount of the monthly payment over a five-year commitment period.

What Information Is Needed for a Bankruptcy Means Test?

To complete the means test forms, gather the following information:

• Sources, amounts, and frequency of your income for the six months preceding your bankruptcy filing.
• A detailed list of monthly living expenses, including food, clothing, shelter, utilities, taxes, transportation, and healthcare.
• Information on median income and living expenses for your community.

The U.S. Department of Justice provides a means testing webpage that guides you to all necessary resources.

Alternatives to Bankruptcy

Bankruptcy should be considered a last resort due to its severe drawbacks for your credit. Here are some alternatives:

Credit Counseling

Seek help from a certified nonprofit credit counseling agency. They can review your household cash flow, help you set up a budget, and possibly work out a program with your creditors.

Debt Consolidation

If you anticipate future difficulty paying your bills and have fair to good credit, debt consolidation could help. Options include taking out a personal loan, borrowing against home equity, or transferring balances to a new card with a 0% introductory APR.

Debt Management Plan

A debt management plan (DMP) is organized through a certified credit counseling agency. The agency presents your creditors with a plan to resolve your debts within three to five years.

Debt Settlement or Debt Relief

Debt settlement companies negotiate with creditors on your behalf, but this option typically carries higher fees and can harm your credit scores.

The Bottom Line

Bankruptcy means testing ensures that individuals with sufficient earnings repay their creditors. By comparing earnings to median income and expenses with median costs, the bankruptcy court seeks fairness. Consulting a bankruptcy attorney is wise if you are subject to a means test.

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