The means test determines whether or not you can file Chapter 7 bankruptcy. Debtors can file Chapter 7 if their income for the last six months is below the state median, which the court takes to mean that they have insufficient means to pay off their debt. Otherwise, the only bankruptcy they can file is Chapter 13, or a “wage-earner’s bankruptcy” wherein the debt is partially paid off in a court-approved repayment plan.
The means test is a test required under the new bankruptcy law to determine a debtor’s eligibility to file for bankruptcy under Chapter 7 of the Bankruptcy Code. If your income is greater than the median income for your state of residence and family size, in some cases, creditors have the right to file a motion requesting that the Court dismiss your cases under Section 707(b) of the Bankruptcy Code. It is ultimately up to the Bankruptcy Judge to decide whether the case should be dismissed.
The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. Period. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.
If it is determined in the first step of the Chapter 7 means test that your income is greater than the median income in your state, you will need to move to the next step to determine your Chapter 7 eligibility.
The second part of the Chapter 7 means test calculates your disposable income (the amount of money that you have at the end of the month after paying your necessary expenses) and compares that with your unsecured debts.
If your disposable income leaves you with insufficient funds to repay unsecured creditors in a Chapter 13 plan, you’ll typically be eligible to file Chapter 7 and have passed the means test.