Who is Eligible to File Chapter 7 Bankruptcy?
Businesses and individuals may file under Chapter 7. Individuals, unlike businesses, may need to undergo a “means test” to determine whether they are eligible for Chapter 7 relief. Conceptually, the “means test” is meant to push certain individuals into chapter 13 if they can afford to pay between $8,175 to $13,650 to nonpriority unsecured creditors under a chapter 13 plan.
Step 1 – is at least 51% of the individual’s total debt “consumer” debt? If not, then the means test does not apply and such debtor can proceed with chapter 7. This test is meant to apply to certain “individual debtors whose debts are primarily consumer debts.” 11 U.S.C. § 707(b)(2). Taxes and business debt is not considered consumer debt.
Step 2 – is the debtors current income greater the recognized median income level? If not, the debtor does not need to take the means test.
Step 3 – take the means test. If the debtor’s income monthly income, (1. after deducting allowances for typical expenses, secured debt payments, and priority debt payments under a chapter 13 plan, is sufficient to pay nonpriority creditors between $8,175 to $13,650 over the life of the plan, then not filing chapter 13 is presumed to be “abuse” and the US Trustee’s office will move to dismiss your chapter 7 bankruptcy if it is not converted to a chapter 13.
The means test is mechanical and complicated. Generally, if you have mostly consumer debts and can afford to pay unsecured creditors a certain amount under a chapter 13 plan, then the means test dictates that you should file chapter 13 as opposed to paying creditors nothing in a chapter 7.