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If you’ve decided to file for Chapter 7 bankruptcy, you should be prepared to pass a “means test.”
A bankruptcy means test determines whether your income exceeds a certain amount. This test is required to show that you’re eligible for Chapter 7 bankruptcy based on your state’s income standards.
The Chapter 7 bankruptcy means test may seem confusing at first, but it’s easier to understand if you break it down. The process involves filling out one or possibly both forms below, and making calculations based on the information you input, to determine whether you pass the bankruptcy means test.
- Form 122A-1: Chapter 7 Statement of Your Current Monthly Income
- Form 122A-2: Chapter 7 Means Test Calculation
If you believe you’re exempt from the means test, may need to fill out an additional form known as a Statement of Exemption.
In this article, we’ll go over what you need to know about Form 122A-1 and Form 122A-2. If you get lost or have more questions about whether bankruptcy is right for you, find a bankruptcy professional to help. We generally recommend starting with a credit counselor — in fact, it’s required by law to do so before filing for Chapter 7 bankruptcy.What is Chapter 7 bankruptcy?
Form 122A-1: Chapter 7 Statement of Your Current Monthly Income
Form 122A-1 focuses on your marital and filing status, as well as your monthly income as compared to your state’s median income.
Who needs to fill it out?
You must file this form if you’re an individual filing for bankruptcy under Chapter 7. If you’re filing for bankruptcy with your spouse, the two of you may file a single Form 122A-1, though separate forms may be required in certain cases.
How to fill it out
Step 1: Fill in your case information.
In a box at the top of the form, you’ll fill in information related to your bankruptcy case. Enter your name, the bankruptcy court you filed in, and your case number if you have one.
You can look up which bankruptcy court you need to file in using the United States Courts’ Court Locator tool. Select Bankruptcy under “Court Type” and enter your ZIP code, and then click “Go”. If you don’t yet have a bankruptcy case number, leave that field blank.
Step 2: Fill in your marital and filing status.
You’ll then need to pick your marital and filing status from the following options:
- Not married
- Married and your spouse is filing for bankruptcy with you
- Married and your spouse is not filing for bankruptcy with you, and you and your spouse are one of the following:
- Living in the same household and not legally separated
- Living separately or legally separated
Step 3: Fill in your income information.
Depending on your answer to the above, you’ll either need to fill out the form detailing only your income or detailing both your income (Debtor 1) and your spouse’s income (Debtor 2) separately in two columns.
Filling out the average monthly income section should be straightforward. Simply add up your income from the previous six months for each source. Then, divide each source’s six-month total by six to get your average monthly income from that source.
You’ll need to fill out your gross wages, which you should be able to find on your paystubs from the previous six months. Make sure you use the gross amount (before taxes and deductions).
You’ll also need to list any other types of income you receive. Make sure to include income you expect to receive from spousal or child support, income from businesses you own, income from investments you own (such as dividends), unemployment income, retirement income or any other income you may receive.
If you don’t remember how much income you’ve received from each of these sources, it may help to look through the previous six months of bank statements.
Make sure you include all of your income. In general, if you receive a deposit in your bank account, that deposit may be income you should consider listing. If you don’t use a bank account, receiving cash or a check may be considered income. Still aren’t sure what qualifies as income? You may want to consult a bankruptcy professional for help.Learn more: How to find the right bankruptcy lawyer for your needs
Step 4: Calculate your total annual income.
Since there are 12 months in a year, multiply your monthly income by 12 to get your annual income. Then, compare your annual income to your state’s annual median family income for your household size, as determined on the United States Department of Justice website. This comparison takes place in Part 2 of Form 122A-1.
To determine the median income amount, scroll down to the yellow box and pick the correct date from the drop-down menu, and then click “Go”. If you haven’t yet filed your case, make sure to pick the most recent time period. Next, click on the “Median Family Income Based on State/Territory and Family Size” link. Find your state in the first column. Then, move across that row to look at the column that pertains to your family size.
For instance, if your family size is three people and you live in Colorado, the income you’d compare yours to would be $84,952 (assuming you’re filing in 2018). You’d place this number on line 13 of the form. If your annual income, as calculated on line 12b, is less than $84,952, you may qualify to file Chapter 7 bankruptcy. If it’s greater than $84,952, you’ll have to continue to Form 122A-2, which we’ll review in the next section.
It should be noted that every state has different median income calculations. While a three-person household’s median income in 2018 would be $84,952 in Colorado, it could be higher or lower elsewhere.
Form 122A-2: Chapter 7 Means Test Calculation
Form 122A-2 focuses on calculating your disposable income based on your income and expenses.
Who needs to fill it out?
If your completed Form 122A-1 shows your income is higher than the median, you must file Form 122A-2. This is the actual “means test” — the calculations you enter on this form determine how much money you have available to pay off other debts.
If that amount is high enough, you may be presumed to have too much income to qualify for Chapter 7 bankruptcy. This is called a presumption of abuse. If Form 122A-2 indicates a presumption of abuse in your case, you may still qualify for Chapter 7 bankruptcy if you can show special circumstances that reduce your income or increase your expenses.
How to fill it out
Step 1: Fill in your case information.
This should mirror the case information from Form 122A-1. If you don’t know your case number, leave that line blank.
Step 2: Determine your adjusted income.
To determine your adjusted income for the purposes of Form 122A-2, you can reference your answers on Form 122A-1.
Specifically, you can copy your total current monthly income from line 11 of Form 122A-1. If you filled in Column B on Form 122A-1, you might have to adjust your current monthly income. Follow the instructions on Line 3 of the form and subtract any portion of your spouse’s income not used to pay for household expenses.
Step 3: Calculate your deductions from your income.
To fill out Part 2 of this form, you’ll need to provide detailed information about your debts and expenses. Read carefully to determine what each line item is asking for.
This process can be frustrating, as the form asks for many different types of information. Make sure to carefully read each line item and think carefully about what it’s asking. If you’re still confused, you may want to consult a bankruptcy professional.
Some of the information you should be prepared to provide includes …
- The number of people who could be claimed as exemptions on your federal tax return, plus the number of any additional dependents you support
- The IRS National Standards for the following based on the number of dependents you support:
- The IRS Local Standards for the following (Section II, 4 on this webpage: Choose your state in the drop-down menu and then look up your amount based on your county, household size and mortgage/rental status):
- Housing and utilities — insurance and operating expenses
- Housing and utilities — mortgage or rent expense
- Vehicle operation expense
- Vehicle ownership or lease expense for up to two vehicles with loans or leases
- Public transportation expense (if no vehicles are claimed)
- Monthly payments for all debts secured by a vehicle
- Names of creditors and payments for secured debt
- Identifying information (address or car identification) for property secured by debt
- Public transportation expenses (in addition to any you claim for a vehicle, but not exceeding the IRS Local Standard for Public Transportation)
- Amount paid for federal, state and local taxes, including income taxes, self-employment taxes, Social Security taxes and Medicare taxes, but not including real estate, sales or use taxes
- Involuntary payroll deductions, such as mandatory retirement contributions, union dues and uniform costs
- Court-ordered payments, likes spousal or child support
- Education expenses required as a condition of your job, or for your physically or mentally challenged dependent child if no public education is available for similar services
- Childcare, not including elementary or secondary education
- Additional healthcare expenses (not including insurance costs) in excess of the IRS National Standard allowances but not including costs reimbursed by insurance or an HSA
- Telecom services for you and your dependents that are necessary for health and welfare, or for the production of income if not reimbursed by your employer, not including basic home telephone, internet or cellphone service
- Health insurance, disability insurance and HSA expenses not included in any item above
- Continuing contributions for the reasonable and necessary care and support of an elderly, chronically ill or disabled member of your household or member of your immediate family who is unable to pay for such expenses
- Expenses related to personal and family safety under the Family Violence Prevention and Services Act or other applicable federal laws
- Additional home energy costs above the insurance and operating expenses set in the IRS Local Standards
- Public or private elementary or secondary school expenses (not more than $160.42 per child) for dependent children under 18
- Additional food and clothing expenses above the IRS National Standards (not higher than 5% of the food and clothing allowances listed in the IRS National Standards)
- Continuing charitable contributions to religious or charitable organizations
- Total amount of past-due payments for priority claims, such as property tax and spousal or child support
- Projected monthly plan payment if eligible for Chapter 13 bankruptcy
- The amount of your total nonpriority unsecured debt (line 3b on Official Form 106Sum, if you filled it out)
Many of these items will require making calculations based on the instructions on the form. For example, line 13c requires you to subtract the average monthly payment for all debt secured by your first vehicle from the ownership or leasing costs amount listed in the IRS Local Standards.
Step 4: Determine whether there is a presumption of abuse.
Once you’ve completed Parts 1 and 2 of Form 122A-2, you’ll calculate your monthly disposable income in Part 3 as seen in the below image.
For instance, if your adjusted current monthly income (line 4 copied to line 39a) was $6,000 and your total deductions (line 38 copied to line 39b) were $5,900, you’d get a monthly disposable income of $100. Then, you’d multiply that by 60 to get a total disposable income over the next five years of $6,000, which you would write on line 39d.
Since your disposable income in line 39d is less than $7,700 in this example, you would check the first box in line 40, indicating that there is no presumption of abuse.
Here’s how to complete line 40 based on your results.
- If your total disposable income is less than $7,700 over the next five years: You may qualify for Chapter 7 bankruptcy and move on to Part 5 of the form.
- If the amount is between $7,700 and $12,850: You must make further calculations involving your nonpriority unsecured debt (lines 41 and 42) to determine if you may qualify.
- If your disposable income exceeds $12,850: There is a presumption of abuse and you must check Box 2 on the top of Page 1 of this form. You do not qualify for Chapter 7 bankruptcy unless you have special circumstances that justify additional expenses or adjustments of current monthly income, which you can calculate in Part 4 of this form.
Once you’ve completed Part 4, review your answers. If you have any questions about the form, you should reach out to a bankruptcy professional before signing it.
What’s next after filling out Form 122A-1 and Form 122A-2?
If you passed the tests
Even if you pass the Chapter 7 means test, you still may not qualify for Chapter 7 bankruptcy.
Aside from passing the means test, you should also be prepared to complete bankruptcy counseling, file a petition with your local bankruptcy court, and attend a creditor meeting, during which you’ll be required to answer questions about your debt, property and financial situation under oath. Read more about these requirements here.
It’s also important to note that Chapter 7 bankruptcy isn’t always the right move just because you qualify for it. You should consider the big picture and consult with a professional to find the best option for your situation.
If you decide to move forward with Chapter 7 bankruptcy, you can file with the help of a professional, by filling out the necessary forms yourself or using a service like Upsolve. You’ll also have to take a credit-counseling class before you file.
If you failed the tests
Just because you fail the Chapter 7 bankruptcy means test today doesn’t mean you’ll fail it again in a couple of months.
Chapter 13 bankruptcy may be an option
If you failed the means test but want to move forward with filing for bankruptcy, explore filing for Chapter 13.What’s the difference between Chapter 7 and Chapter 13 bankruptcy?
Chapter 13 bankruptcy allows you to reorganize your debt to repay some or all of it off over a three- to five-year period. Chapter 13 bankruptcy may also give you the ability to keep certain property that you own, such as a primary residence.
The Chapter 7 means test helps determine if you qualify for Chapter 7 bankruptcy. Filling out the forms can be complicated, so it’s often a good idea to consult with a bankruptcy professional to help you correctly fill them out.
It’s also important to remember that bankruptcy is a serious legal decision that comes with real consequences. Make sure you explore all of your options before deciding to move forward with Chapter 7 bankruptcy.
Bankruptcy’s negative effect on your credit may include making it harder to secure credit in the future and having to pay higher interest rates on any debt you do end up taking on. To learn more, read our article on what happens to your credit when you file for bankruptcy.