Call for a Free Consultation 281.954.3161
Helping Our Clients Overcome Debt Since 1983 Board Certified Bankruptcy Attorney with Your Best Interests in Mind

The Chapter 7 Means Test

Bankruptcy Guidance from an Experienced Galveston County Lawyer

Before filing for bankruptcy in Texas, you are required to take a means test. The means test helps determine “disposable income,” an important concept in filing bankruptcy. It simply determines whether an individual has any money remaining in their budget after paying all necessary living expenses.

If there is money left over, then the individual must file a reorganization bankruptcy (typically Chapter 13) to pay back creditors. If there is no disposable income, then they are qualified to file a Chapter 7 and receive a discharge without paying creditors back.

Of note, disabled veterans are entirely exempted from the means test if they incurred the debt while on active duty. Additionally, military reservists and National Guard members called to active duty after September 11, 2001 could qualify for a means test exemption.

Contact us online or call (281) 954-3161 to schedule an initial consultation. We proudly serve the people of Friendswood, Houston, and Pearland.

The Simplified Means Test

To fully explain the working and effects of the Means Test would take a book. A simple overview follows.

Check Your Household Income Against Your State's Median Income

Determine the last six months' average gross income from all sources, including bonuses, overtime, and child support received. Once you've determined that average amount, multiple that by 12 to determine your average annual income.

The unfair aspect of this step occurs when someone, through job disruption or illness, is no longer earning that average. Whether or not the income average will be earned in the future is not taken into account at this stage.

Compare the average income to the median income for a family of your size in your county. This changes every year, and current numbers can be found on the US Bankruptcy means testing page.

If the average is at or below the median income, you automatically pass the Means Test and may file either a Chapter 7 or Chapter 13. If the income is more than the median, proceed to the next step.

Determine Your Disposable Monthly Income

Subtract from the average household income, not your ACTUAL monthly expenses but the Internal Revenue Service guidelines for what they think the expenses OUGHT to be. This is what catches most people. The IRS guidelines discount many of what are typically considered necessary living expenses.

The debtor does receive a deduction for house payments and cars, but even then not always the full deduction. For instance, if a debtor has a monthly car payment of $600 on a balance of $12,000, they only receive a Means Test deduction for $200. The deduction is figured on the 60 months of a Chapter 13 plan rather than the 20 months remaining on the loan.

Another issue is the repayment of 401k loans. Although repayment is allowed in bankruptcy, they are not allowed as a deduction on the Chapter 7 Means Test unless they are “mandatory," or you will be fired for not paying them.

Use Your Disposable Income Amount to Determine Your Bankruptcy Filing

If the disposable income exceeds $110, you must file a Chapter 7, absent compelling extenuating circumstances.

If Chapter 13 is filed, the Chapter 13 disposable income test is used to determine not how much is paid to the Chapter 13 Trustee, but rather how much is paid to unsecured creditors without priority (credit cards and other bills without collateral).

For instance, let’s take a case that needs $1000 per month to pay the mortgage, cars, and Chapter 13 Trustee fees. A disposable income of $300 means that over and above any money needed to pay car loans, mortgage payments, and taxes, unsecured creditors must be paid $300 x 60 months = $18,000. In other words, the Trustee payment must be at least $1300 rather than $1000.

Common Mistakes Made on the Means Test

You may be considering Chapter 7 bankruptcy because of the amount of debt you are in. The means test is used to determine whether you are eligible or not. There are common mistakes that one must know in order to avoid them. Here are some commonly made mistakes:

  • Using the wrong household size - Many applicants fail to correctly report additional income from their household size.
  • Actual income documentation - It is important to double check the math when determining what your income is.
  • Taking the Means Test unnecessarily - Many applicants do not realize that their income is too high based on the state's median income to pass the test.

Learn More About The Means Test in Galveston County

The Means Test is complex and fact-intensive. To prepare it correctly requires provable income and expense numbers as well as the knowledge and experience of a qualified Galveston County bankruptcy attorney.

Contact John E. Smith & Associates at (281) 954-3161 today!

Why John Smith Is the Right Attorney

To Handle Your Bankruptcy Matters
  • Free & Confidential

    Case Evaluations

  • Voted "Top Lawyer"

    by Houston Magazine

  • Over 35 Years of

    Legal Experience

  • When You Hire John,

    You Get Him.