Understanding the Means Test for Chapter 7 Bankruptcy in Texas: Your Guide to Eligibility

The Means Test—The Gatekeeper to Chapter 7 Bankruptcy

If you’re thinking about filing for Chapter 7 bankruptcy in Texas, there’s one major hurdle to consider: the Means Test. This test is essentially the gatekeeper for Chapter 7 bankruptcy, designed to determine whether or not you qualify based on your income and expenses. It may sound daunting, but the Means Test is simply a calculation that decides if Chapter 7 is the right fit for you. And if you’re worried about complex math, don’t be—bankruptcy attorneys deal with these numbers every day and can help guide you through the process.

In this guide, we’ll break down what the Means Test is, how it works, and why it matters. We’ll go step-by-step, so by the end of this, you’ll understand not only how the Means Test applies to you, but also what options are available if you don’t meet the requirements for Chapter 7. Whether you’re knee-deep in debt or simply curious about the process, this guide is here to make things a bit clearer.

What is the Chapter 7 Means Test?

The Means Test is a financial calculation created to ensure that only those who truly need debt relief qualify for Chapter 7 bankruptcy. In simple terms, it’s a way to evaluate whether your income is low enough to justify discharging your debts through Chapter 7 rather than paying them back over time, as you would in Chapter 13 bankruptcy.

The test compares your monthly income against the median income for a household of your size in Texas. If your income is below the median, you’re typically eligible for Chapter 7. If your income is higher, you’ll go through a more detailed calculation that factors in your expenses to see if you still qualify.

Step 1: Checking Your Income Against the Texas Median

The first step of the Means Test is to look at your average monthly income over the past six months and compare it to the median income for a household of your size in Texas. The median income figures are updated periodically, so it’s essential to use the latest numbers. As of the most recent update on U.S. Trustee’s website, the approximate median income for Texas households is:

• 1-person household: $56,000
• 2-person household: $74,000
• 3-person household: $82,000
• 4-person household: $90,000
• Add $9,000 for each additional family member

If your income is below the median, you’re in the clear! You automatically pass the Means Test and can proceed with Chapter 7 bankruptcy. If your income is above the median, don’t worry—there’s still a second part to the Means Test.

Step 2: Calculating Disposable Income Through Allowable Expenses

If your income exceeds the median, the Means Test continues with a deeper look at your disposable income. This involves deducting certain allowable expenses from your monthly income. The goal here is to determine if you have enough disposable income left to repay your debts, in which case Chapter 13 may be a better fit.

Some of the allowable expenses include:

• Housing costs: Mortgage or rent payments, utilities, and basic home maintenance.
• Transportation costs: Monthly car payments, gas, insurance, and vehicle maintenance.
• Healthcare expenses: Medical bills, prescription costs, and necessary health-related expenses.
• Living expenses: Food, clothing, and other necessities, based on IRS standards for Texas.

The Means Test formula can get complex, especially since it’s based partly on national and regional standards and partly on your actual expenses. But in essence, if your remaining disposable income after expenses is low enough, you may still qualify for Chapter 7.

Why the Means Test Exists

The Means Test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005 to prevent high-income individuals from using Chapter 7 to discharge their debts when they might otherwise be able to repay them. The idea was to make Chapter 7 bankruptcy available primarily to those truly in need of debt relief.

Failing the Means Test: What Are Your Options?

If you don’t pass the Means Test, you’re not out of options. Here’s what you can consider:

1. File for Chapter 13 Bankruptcy: Chapter 13 bankruptcy is an excellent alternative if you don’t qualify for Chapter 7. With Chapter 13, you can keep your assets and set up a repayment plan based on your income and expenses over three to five years. For more details on this, read our guide on Chapter 13 bankruptcy in Texas.
2. Try Again in a Few Months: The Means Test looks at your last six months of income, so if your income has recently dropped, waiting a few months and then reapplying may help you qualify.
3. Reduce Household Expenses: In some cases, restructuring your budget and reducing unnecessary expenses might change your disposable income enough to meet the requirements.
4. Seek Professional Guidance: A bankruptcy attorney can offer personalized advice and strategies based on your financial situation. Often, there are small details and adjustments that make a big difference in the Means Test outcome.

How Long Does the Means Test Process Take?

The Means Test process can vary, but once your financial information is gathered, an attorney can typically complete the calculation within a few days. The most time-consuming part is often collecting the necessary documentation, which includes pay stubs, bank statements, and a list of monthly expenses. Afterward, if you pass the Means Test, you’re ready to proceed with your Chapter 7 bankruptcy case.

Frequently Asked Questions About the Means Test in Texas

Q: What if my income is inconsistent?

If you have irregular income, the Means Test can be tricky. Seasonal workers, freelancers, or those with fluctuating income may benefit from consulting an attorney who can calculate an average income that best reflects your situation.

Q: Are all types of income included in the Means Test?

Most income sources are included, but certain benefits—like Social Security income and disability benefits—are generally excluded. Your attorney can help clarify which income sources matter in your case.

Q: Does passing the Means Test guarantee Chapter 7 eligibility?

Passing the Means Test is a big step toward Chapter 7 eligibility, but other factors (like prior bankruptcy filings) can impact your case. Passing the Means Test means you’ve cleared a major requirement, though it’s still essential to work with an attorney to ensure a smooth filing process.

Q: How often are the income limits updated?

The median income limits are typically updated annually. Using outdated figures can lead to incorrect results, so always consult with a professional or visit the U.S. Trustee’s website for the latest numbers.

Real-World Example: The Means Test in Action

Let’s look at a real-world example to see how the Means Test might apply.

Scenario: Maria, a Texas resident, is a single mother with two children. Her average monthly income over the last six months is $7,500, totaling $90,000 annually. The Texas median income for a household of three is $82,000, so she’s over the threshold.

Maria moves to the second part of the Means Test, deducting her monthly expenses, which include $1,200 for rent, $500 for transportation, $700 for healthcare, and $1,200 for food and household expenses. After deducting these expenses, her disposable income is reduced to a level that qualifies her for Chapter 7.

This example shows how the Means Test works to provide a fair assessment of who truly qualifies for debt relief under Chapter 7.

Important Tips for Passing the Means Test

1. Accurate Documentation: The Means Test requires precise income and expense records. Organize pay stubs, tax returns, and receipts to ensure accurate calculations.
2. Know Which Deductions Count: Certain allowable expenses, such as necessary medical costs or childcare, can help you reduce disposable income. Use every allowable deduction available to you.
3. Get Professional Help: Bankruptcy attorneys understand the nuances of the Means Test. A small error can lead to a failed test, but an attorney’s guidance can improve your chances of qualifying.
4. Plan Ahead if Possible: If you anticipate income changes, waiting until your income reflects your actual financial situation may improve your eligibility.

Why You Don’t Have to Face the Means Test Alone

The Means Test can be confusing and sometimes frustrating. But you don’t have to face it alone. A bankruptcy attorney can help you navigate each step, ensuring that your income and expenses are accurately represented and that you use every allowable deduction.

The Means Test is designed to help those in genuine financial need find relief. With the right help and resources, you can pass the Means Test or find an alternative bankruptcy solution that aligns with your financial needs.

Is Chapter 7 Bankruptcy Right for You?

Chapter 7 bankruptcy isn’t the right choice for everyone, but if you’re struggling to meet debt obligations and feel overwhelmed, it could offer a fresh start. The Means Test is there to ensure Chapter 7 remains available to those who genuinely need it, and with the right support, you can determine if it’s the best path for you.

If you’re considering bankruptcy and want guidance through the Means Test and filing process, visit Kisch Consumer Law. Our experienced Texas bankruptcy attorneys will help you understand your options and work with you to find the best solution for your financial future.