Chapter 7 Means Test

To file a Chapter 7 bankruptcy, you must pass a means test demonstrating you do not earn enough income to repay your debts after consideration of specific monthly expenses. If your household income over the past six months is below the median household income in your state, you typically pass this test. If your household income is above your state’s median income, expenses such as housing, automobiles, utilities, student loans, tax payments, alimony or spousal support, child support, child care, health care, and other essentials are considered to determine if you have disposable income available to pay back your creditors.

In the Commonwealth of Massachusetts, the median household income standards as of May 15, 2021, are as follows:

1 Member – $71,708
2 Member – $92,034
3 Member – $112,146
4 Member – $142,040

If your annual household income is below the standard, you are likely eligible for a Chapter 7 bankruptcy that will not require a repayment plan. If greater, you may still be eligible for a Chapter 7 bankruptcy after consideration of monthly expenses. If it is determined that you have available income each month to repay creditors, you may need to file a Chapter 13 bankruptcy. This is typically called a “repayment” bankruptcy. In a Chapter 13 bankruptcy, you are required to submit a proposed repayment plan to repay all or some of your debts over a period of three or five years. Plans are based on income, and the amounts and types of debts. There are benefits to a Chapter 13 bankruptcy as repayment plans allow for the payment of back taxes and past due mortgages or car payments to avoid foreclosure or repossession.

There is an exception to the rule requiring a means test if your debts are primarily related to a business. The means test only applies when the majority of debts are consumer based. The Bankruptcy Code defines consumer debt as “debt incurred by an individual primarily for a personal, family, or household purpose.” See 11 U.S.C. § 101(8). If your debts are primarily commercial in nature, you may be exempt from the means test referenced above. When some of the business debt can potentially be identified as consumer debt, a debtor may need to be able to provide evidence that the obligation was incurred for commercial purposes. The courts, the Justice Department, and Chapter 7 bankruptcy trustees look closely at debts classified as business or non-consumer debt. If you have a business loan from a bank or an auto loan on a commercial vehicle this may be obvious. If you have incurred credit card debt on behalf of the business, this may require further review.

If you are struggling as a result of debts, you may be able to discharge or terminate these debts without a repayment plan through Chapter 7 bankruptcy. If you are considering filing for bankruptcy in Massachusetts and wish to speak to an experienced bankruptcy attorney, please contact us at 617-431-8071 to schedule a consultation.