PA Bankruptcy Means Test: What It Is & How It Works

Bankruptcy can seem very complicated to your average person. There are a lot of factors which determine not only if you are eligible for bankruptcy, but which specific chapter of bankruptcy. For the majority of individuals, the options are usually chapter 7 or chapter 13. However, you cannot simply choose whichever of these you like. Instead, a test is required to guide the decision for you. This test is called the means test. 

What Is Means Testing?

The means test is used to determine whether or not a person qualifies for chapter 7 bankruptcy, where they can liquidate their assets to pay creditors and any remaining debt after this is discharged. The means test is intended to prevent people from taking advantage of the bankruptcy system by filing for chapter 7 bankruptcy when they could actually afford to repay some or all of their debts through a chapter 13 bankruptcy plan.  

How It Works

The means test is complicated and should be done with the help of a bankruptcy attorney to ensure there are no errors. It is generally reviewed by the Office of the United States Trustee for accuracy.  The process begins by calculating your current monthly income (CMI). First, you must gather all bills, bank statements, tax returns, and proof of all household income for the previous 6 months. It should be noted that this must include all forms of household income, meaning that even if you are filing for bankruptcy as an individual, your spouse’s income must be included in the calculations. You must also include any money received from pensions, retirement benefits, rental income, interest, dividends, royalties, tax refunds, unemployment benefits, and any other sources of income such as 401k retirement distributions and the sale of any items.  All income earned in the previous 6 calendar months is then added together and divided by 6 to arrive at your CMI. This number is then compared to the median monthly income in Pennsylvania. If your income is found to be less than the median monthly income, you are said to have “passed” the means test at the first step.   If your income is above the median monthly income, you are required to go to a further step where you carefully input certain categories of household expenses.  The means test form currently has approximately 43 calculations required to then input data into the form.          

Chapter 7 Means Test

If you have passed the means test, the law assumes you do not have the ability to repay your creditors and you are deemed eligible for chapter 7 bankruptcy. Chapter 7 bankruptcy consists of a trustee selling your nonexempt assets. The proceeds from these sales are then used to pay your creditors. This process usually takes 4-6 months. For those that are eligible, chapter 7 offers a quick way to take care of debt, allowing you to begin rebuilding your financial health sooner.  Note that your attorney will generally be able to exempt your assets or the attorney will advise you against chapter 7 bankruptcy.   

Chapter 13 Means Test

If you have failed the means test, then chapter 13 bankruptcy may be the path forward for you. Chapter 13 bankruptcy consists of:

• Debtors creating a plan to repay their debts over three to five years.
• Debtors making monthly payments to creditors.
• Creditors not being able to collect on debts except through the bankruptcy court.
• Debtors keeping their property.

The CMI calculated during the means test will be used to determine how much you can realistically pay to your creditors each month. 

Means Test Exemptions

The means test has several exemptions. These include:

• Non-consumer Debts: If your debts are primarily business-related (50% or more) you will not have to take the means test. Business debt includes:

• Car loans for business vehicles.
• Debts owed to business vendors and suppliers.
• Personal guarantees and other liabilities related to your business.
  

• Disabled Veterans: Veterans who are disabled and incurred their debt while they were active duty do not have to take the means test. A disabled veteran will be eligible for this means test exemption by meeting one of the following factors:

• A disability rating of 30% or higher.
• A discharge from active duty because of a disability that occurred in the line of duty.

• National Guard and Reservists: If you were a reservist or national guardsman on active duty or performing a homeland defense activity for 90 days or more, you are exempt from completing the means test during that time and for 540 days after that.

It should be noted that just because you are exempt from taking the means test does not mean you automatically qualify for chapter 7 bankruptcy. In cases of exemption, the court will compare Schedule I: Your Income and Schedule J: Your Debt in order to determine your eligibility for chapter 7. If it is found that you have a large amount of disposable income, your case may be converted to chapter 13. 

What Happens If You Fail a Means Test?

Failing the means test does not mean you cannot file for bankruptcy. It simply means that you cannot file for chapter 7 bankruptcy. This is because failing the means test usually signifies that you have the financial ability to repay your debts. For this reason, when you fail the means test, you will instead have to file for chapter 13 bankruptcy, in which you create a repayment plan to pay back a portion of your debts over a set period of time under court supervision. The plan must include the repayment of mandatory debts, such as priority and secured debts, and a portion of debts owed to nonpriority, unsecured creditors.  Finally, sometimes timing the case to match a period of lower income is critical.  A good attorney will advise you so you obtain the best possible outcomes.