When overwhelming debt makes it impossible to keep up with monthly payments, Chapter 7 bankruptcy offers a path to financial relief by discharging most unsecured debts. However, not everyone qualifies. The U.S. Bankruptcy Code includes a critical gatekeeping tool called the Means Test that determines whether your income is low enough to use Chapter 7. Understanding the Means Test in detail is essential for anyone considering bankruptcy, because it directly affects whether you can wipe out debts without a repayment plan. This article provides a comprehensive, step-by-step breakdown of how the Means Test works, what income and expenses are counted, how to calculate your disposable income, and what happens if you fail the test.

What Is the Means Test?

The Means Test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Its purpose is to ensure that Chapter 7 bankruptcy is reserved for debtors who genuinely cannot afford to repay their debts. The test compares your current monthly income to the median income for a household of your size in your state. If your income is below the median, you pass automatically. If it is above the median, you must subtract allowed expenses to see if you have enough disposable income to fund a Chapter 13 repayment plan instead.

The test applies only to individual debtors (not businesses or corporations) and is based on the six months of income immediately before the bankruptcy filing date. The court uses this historical average rather than your income on the day you file. This prevents someone from temporarily reducing their income to qualify.

The Two-Step Process

The Means Test works in two distinct steps. The first step is a simple income comparison. The second step involves a detailed expense calculation. Both must be completed honestly and accurately.

Step 1: Compare Your Income to the State Median

You begin by calculating your Current Monthly Income (CMI). CMI is the average of all income received during the six-month lookback period. This includes wages, self-employment income, unemployment benefits, Social Security (except in some limited cases), rental income, and most other regular sources of money. One-time gifts or tax refunds may also be included. Once you have the six-month total, divide by six to get your CMI.

Next, compare your CMI to the median income for a household of your size in the state where you reside. The U.S. Trustee Program publishes these median income figures for each state and updates them periodically. For example, in 2025 the median income for a single-person household in California might be around $60,000, while in Mississippi it might be closer to $40,000. If your CMI is equal to or less than the median, you automatically pass the Means Test and can proceed with Chapter 7. If your CMI exceeds the median, you move to Step 2.

Step 2: Calculate Disposable Income

If your income exceeds the state median, you must now determine your disposable income. Disposable income is defined as CMI minus allowed monthly expenses. The allowed expenses are not necessarily what you actually spend; rather, they are standardized amounts set by the IRS and the bankruptcy code. This prevents debtors from inflating expenses to fail the test intentionally.

You deduct the following categories of expenses in order:

  • Living expenses based on IRS National Standards (food, clothing, housekeeping supplies, personal care, miscellaneous). These are fixed amounts for your household size.
  • Out-of-pocket healthcare expenses (actual costs beyond insurance premiums).
  • Housing and utilities based on IRS Local Standards (specific to your county and household size).
  • Transportation costs using IRS Local Standards (ownership and operating expenses for up to two vehicles).
  • Other actual necessary expenses that are reasonable and not covered by the standards, such as childcare, health insurance premiums, taxes, court-ordered payments, and charitable contributions.

After subtracting all allowable expenses from your CMI, the remaining amount is your monthly disposable income. This figure is then multiplied by 60 (representing the 60-month duration of a Chapter 13 plan) to determine your total disposable income over five years.

Income Calculation: The Six-Month Lookback

Understanding precisely what counts as income during the lookback period is crucial. The six-month period ends on the last day of the calendar month immediately before your filing. For example, if you file on July 15, 2025, the lookback period is January 1 through June 30, 2025. You must average all income received during those six months, even if you received a large bonus in one month and nothing in another.

Specific income sources considered include:

  • Wages, salaries, tips, commissions, and bonuses
  • Self-employment net income
  • Rental income (gross rents minus ordinary expenses)
  • Unemployment compensation
  • Alimony or spousal support (if you receive it)
  • Most retirement distributions and pension income
  • Regular contributions from others living in your household (e.g., a spouse's income even if not jointly filing)

Social Security income (retirement, disability, SSI) is generally excluded from CMI under the bankruptcy code. Once you file, the court will also consider changes in circumstances, but the initial calculation relies on the six-month average.

Allowed Expense Deductions

If you proceed to Step 2, the expense deductions follow a strict hierarchy. The bankruptcy code mandates use of IRS National and Local Standards for most categories rather than your actual spending. This prevents abuse and creates consistency.

National and Local Standards

The IRS has two sets of standards: National Standards cover food, clothing, housekeeping supplies, personal care, and miscellaneous expenses. These amounts are based on household size and are the same across the entire United States. For example, a household of one has a national standard of about $800 per month; a household of four may be around $1,500. You may claim these amounts even if your actual spending is lower.

Local Standards cover housing and utilities as well as transportation. Housing and utility amounts vary by county and household size. Transportation standards include both ownership costs (lease or loan payments) and operating costs (gas, maintenance, insurance). You can claim the standard amount for ownership only if you actually have a car loan or lease; otherwise, you must use the operating cost standard alone. If your actual transportation costs are higher than the local standard, you may be able to use the higher amount with proper documentation and justification.

Other Necessary Expenses

Beyond the IRS standards, you may deduct certain actual necessary expenses. These include:

  • Health insurance premiums
  • Life insurance (if term life only)
  • Court-ordered support payments (child support, alimony)
  • Childcare expenses (necessary for work)
  • Educational expenses for dependents (up to $2,000 per year per dependent)
  • Taxes (payroll, income, property taxes)
  • Mandatory payroll deductions (union dues, retirement contributions if required by employer)
  • Charitable contributions (up to 15% of gross income, but only if documented)

Any expense not listed above must be shown as reasonable and necessary for your health and welfare or for the production of income. The court may disclose excessive claims.

The Disposable Income Threshold

After deducting all allowed expenses, your remaining disposable income per month is multiplied by 60. This gives the amount you could theoretically pay to unsecured creditors over five years. The Means Test then applies a threshold to determine eligibility for Chapter 7:

  • If your total disposable income over five years is less than $7,700 (as of 2025), you qualify for Chapter 7.
  • If it is between $7,700 and $12,850, the court looks at whether the amount represents at least 25% of your unsecured debt. If it does, then you fail the Means Test. If it is less than 25%, you may still pass.
  • If your disposable income over five years is more than $12,850, you are presumed to have the ability to repay some debts, and you fail the Means Test for Chapter 7. You may then consider Chapter 13 bankruptcy, which requires a repayment plan using your disposable income.

These thresholds are adjusted periodically for inflation. Your attorney will have the current numbers.

Exceptions and Special Circumstances

Certain debtors are exempt from the Means Test or can use special rules. The two most common exceptions are:

Disabled Veterans

If you are a disabled veteran whose indebtedness occurred primarily during active duty, you may be exempt from the Means Test entirely. This applies only to debts incurred while on active duty or while performing homeland defense activities. You must provide documentation of your disability rating and the timing of the debts.

Business Debts

If at least 50% of your total debt is from operating a business (including farming), and you have more business debt than consumer debt, the Means Test does not apply. This exception allows small business owners and farmers to access Chapter 7 without the income test. However, you must prove that the majority of your debts are business-related.

Additionally, if you are a low-income debtor (below the median), you automatically pass no matter what. Even if you have substantial disposable income, the fact that your CMI is under the median means you pass Step 1 and never proceed to Step 2.

What If You Fail the Means Test?

Failing the Means Test does not mean you cannot file for bankruptcy. It simply means you cannot use Chapter 7. You may file for Chapter 13 bankruptcy instead. In Chapter 13, you submit a repayment plan that lasts 3 to 5 years, during which you use your disposable income to pay back a portion of your debts. At the end of the plan, remaining qualifying debts are discharged.

In some rare cases, you may still be able to argue for Chapter 7 even if you fail the Means Test. This is known as the "special circumstances" exception. You must show that because of extraordinary events (such as serious medical expenses, a disaster, or caring for an elderly parent), your actual expenses exceed the IRS standards. The court will review your documentation and may allow you to proceed with Chapter 7 if you can demonstrate that your disposable income is actually lower than the test indicates.

How an Attorney Can Help

The Means Test is filled with technical rules, standardized amounts, and deadlines. A minor mistake in the six-month average or the choice of allowable expenses can throw off the entire calculation. A qualified bankruptcy attorney can help in several ways:

  • Gather and verify income data from pay stubs, tax returns, and bank statements covering the exact six-month window.
  • Identify all allowable expenses and apply the correct IRS standards for your location and household size.
  • Prepare the official Means Test forms (B 122A-1 and B 122A-2) with accurate figures.
  • Advise on timing – sometimes delaying a filing by a month or two can change the six-month average and move you below the median.
  • Argue special circumstances if you fail the test but have a compelling reason why you cannot repay.
  • Transition to Chapter 13 if necessary, and structure a feasible repayment plan.

Many bankruptcy attorneys offer free initial consultations, which can help you understand where you stand before you commit to filing.

Common Myths About the Means Test

Misinformation about the Means Test abounds. Let's clear up a few persistent myths:

  • Myth: "I don't qualify because I have a high income." Not necessarily. Income levels vary by state, and even high earners may pass if they have substantial allowable expenses (e.g., large family, high mortgage, multiple car payments). The test looks at disposable income, not gross income.
  • Myth: "The Means Test uses my current income." It uses your average income from the past six months, not your current situation. A recent job loss could lower your six-month average, making you eligible.
  • Myth: "I can include my actual rent and utility costs." Not always. If your actual housing costs exceed the IRS Local Standard for your county, you can only claim the standard unless you can prove special circumstances. For many debtors, the standard amount is lower than what they pay.
  • Myth: "If I fail the Means Test, I cannot file bankruptcy." False. You can still file Chapter 13, which offers its own discharge after completing a payment plan.
  • Myth: "Social Security income counts against me." Social Security is excluded from CMI by law. However, it may factor into your ability to pay expenses in a Chapter 13 case.

Conclusion

The Means Test is a powerful but often misunderstood tool in Chapter 7 bankruptcy. It serves the important purpose of directing those who can afford to repay some debts into Chapter 13, while allowing those with genuinely limited means to get a fresh start. By understanding the two-step process – income comparison and expense deduction – you can gauge your own eligibility. However, because the test involves complex rules, standardized IRS amounts, and strict documentation, it is wise to consult with an experienced bankruptcy attorney before filing.

For further reading, visit the U.S. Courts Means Test page, review the full text of 11 U.S. Code § 707(b) on abuse presumption, and check the U.S. Trustee's Means Testing page for current median income figures and expense standards. With the right guidance, you can navigate the Means Test and move confidently toward a debt-free future.