Individuals and families considering Chapter 7 bankruptcy must complete a means test to determine whether they can make full or partial repayments to their creditors. Those who cannot afford repayment installments are eligible for Chapter 7 bankruptcy, which discharges most debts, but may require forfeiture of assets. Individuals who can afford to make some repayments must complete a second step to determine whether they qualify.

The Chapter 7 means test is a two-part inquiry that compares average income from the six months before filing to Wisconsin’s median income for the filer’s household size. Anyone who falls below that threshold automatically qualifies for Chapter 7 bankruptcy protection. Filers above the threshold move to a second step, which subtracts a specific set of allowed expenses from the filer’s income and compares what is left over to a fixed dollar threshold set by the Bankruptcy Code.

Filers who clear both steps trigger a rebuttable “presumption of abuse” that can block eligibility for Chapter 7 bankruptcy protection or move a case toward Chapter 13 bankruptcy. Being above Wisconsin’s median income threshold does not automatically disqualify someone from Chapter 7 bankruptcy protection. It simply requires a second calculation to determine whether a filer may still qualify.

Key Takeaways

• The means test is used to determine whether a filer qualifies for bankruptcy protection under Chapter 7.
• Social Security payments for retirement, disability, and SSI are excluded from consideration.
• Filers whose income is above Wisconsin’s median household income can subtract allowed expenses to determine monthly disposable income. A presumption of abuse arises only if that amount, projected over 60 months, is above specific statutory thresholds.
• A presumption of abuse can be rebutted with documented “special circumstances” such as a serious medical condition or active military service.
• Certain disabled veterans, reservists, and National Guard members called to active duty are exempt from the means test, regardless of income.

What Is the Chapter 7 Means Test?

The Chapter 7 means test is a two-part calculation performed under 11 U.S.C. §707(b) to determine whether a filer’s income is low enough to qualify for Chapter 7 bankruptcy protection.

The first step compares the filer’s household income for the six months immediately before filing with the median income for the filer’s household size. Filers who fall below the threshold amount automatically qualify for Chapter 7 bankruptcy protection. Filers above the threshold move to step two, which calculates a filer’s disposable income against fixed dollar thresholds established by the U.S. Bankruptcy Code.

Most Chapter 7 filers pass step one, which ends the inquiry. They qualify for Chapter 7 bankruptcy protection and do not need to move on to step two.

Some filers can skip the means test altogether, regardless of income. Disabled veterans whose debt was incurred primarily while on active duty, and reservists or National Guard members called to active duty or performing homeland defense activity after September 11, 2001, qualify for Chapter 7 bankruptcy protection under 11 U.S.C. §707(b)(2)(D).

Calculating Current Monthly Income: Certain Income Included

Under 11 U.S.C. § 101(10A), “current monthly income” means the debtor’s gross average monthly income over the six calendar months before filing, annualized for comparison to the state median. It does not include Social Security benefits, including retirement, disability, and SSI, regardless of amount. Payments to victims of war crimes, crimes against humanity, international terrorism, and domestic terrorism on account of their status as victims of such crimes are also excluded.

Comparison to Wisconsin’s Median Income

Once income has been calculated and annualized, it is compared to Wisconsin’s median family income for the filer’s household size. The median family income data for Wisconsin is as follows:

• 1 earner: $71,168
• 2 people: $90,252
• 3 people: $108,516
• 4 people: $133,384
• Add $11,100 for each individual in excess of 4

If income is at or below the median, the filer qualifies for Chapter 7 bankruptcy protection, and the inquiry ends there. (Statutory thresholds are current as of this writing and are subject to period adjustment.)

What Happens When Your Income Is Above the Median?

Individuals or households with an income above the median are not automatically disqualified. Using Official Form 122A-2, a filer can subtract allowed expenses from current monthly income to calculate monthly disposable income. Allowed expenses combine the standardized IRS national and local figures for food, clothing, housing, and transportation with actual costs like payments on secured debt and priority debts like taxes or support obligations.

Under 11 U.S.C. §707(b)(2)(A)(i), a presumption of abuse arises only if the filer’s 60-month total disposable income is at least 25% of the filer’s nonpriority unsecured debt or $10,275, whichever is greater; or $17,150. (Statutory thresholds are current as of this writing and are subject to period adjustments by notice of the Judicial Conference of the United States.)

What If a Filer’s Bankruptcy Petition ‘Fails’ the Means Test?

A filer whose income exceeds the Chapter 7 means test triggers a presumption of abuse, which means bankruptcy relief under this chapter is presumed to be inappropriate. This leads to a mandatory review rather than automatic termination of the application.

Under 11 U.S.C. §707(b)(2)(B), a presumption of abuse can be rebutted using documented, itemized evidence of “special circumstances” such as a serious medical condition or a call to active military duty.

If the presumption of abuse arises and is not rebutted, the case is flagged for review by the U.S. Bankruptcy Trustee or the case trustee. A creditor can also move to dismiss the case or convert it to a Chapter 13 filing.

How an Experienced Wisconsin Bankruptcy Attorney Can Help

Qualifying for Chapter 7 bankruptcy protection is more nuanced than meeting a specific income number. While many qualify automatically, filers whose income is above the initial threshold may still qualify after deductions for food, clothing, housing, and transportation, plus actual costs like payments on secured debt and priority debts like taxes or support obligations.

The bankruptcy attorneys at Muter Law Office represent clients in Wisconsin bankruptcy proceedings and can evaluate your situation to determine whether you qualify under the Chapter 7 means test. Muter Law Office offers practical, cost-effective solutions to help individuals struggling with debt. Contact the Muter Law Office today to schedule a free and confidential appointment to discuss your situation and how we can assist you.