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Chapter 7 is alive and well despite the "means test": a government report reveals that the "means test," which was rumored to render Chapter 7 bankruptcies largely unavailable back in 2005, only affects debtors in a small percentage of bankruptcy cases.


The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") presented sweeping changes to the Bankruptcy Code. (1)

Three years after the passage of BAPCPA, the changes it brought remain misunderstood by much of the legal community. One of the most pervasive and disturbing misconceptions surrounding the Act is that it rendered relief under Chapter 7 of the Code unavailable to most debtors. (2) This misconception is so widely held that it made its way into the ISBA's Legal Health Checkup:
   [M]ost bankruptcy filers won't be allowed to use
   Chapter 7 (where most overdue bills and credit
   card debts are cancelled). Instead, they'll have to
   "reorganize" their finances and pay back what
   they owe according to a schedule ordered by the
   United States Bankruptcy Court. (3)

Contrary to popular opinion, bankruptcy relief under Chapter 7 is still widely available. This article seeks to explain the real impact of 11 USC section 707(b)(2), the "means test" that was allegedly going to eliminate Chapter 7 bankruptcy.

How the means test works

Dismissals of Chapter 7 cases are governed now, as before the passage of BAPCPA, by 11 USC section 707. (4)

11 USC section 707(b)(1) allows for the dismissal of Chapter 7 bankruptcy petitions when the court finds that granting the debtor a discharge would be an abuse of the chapter's provisions. For example, the court might well find that granting the debtor a discharge under Chapter 7 would be abusive when a debtor's income significantly exceeds his or her monthly expenditures. In such cases, the court would rule that because debtors have the ability to repay their debts, they should be required to do so.

The means test, (5) contained in section 707(b)(2), creates a mathematical formula under which abuse may be presumed, creating a basis for dismissal under section 707 (b)(1).

Debtors seeking Chapter 7 relief are required to file a schedule of current monthly income and expenditures with their petitions. (6) The debtors' current monthly income is defined as their average income for the six calendar months preceding the date of filing, (7) meaning that if a debtor files on July 15, 2008, then his or her monthly income from January 1, 2008, to June 30, 2008, will be considered.

The first question to ask after calculating the debtor's average monthly income for the applicable period is to compare it to the median income for the state. As of this writing, Illinois' median income level for a single debtor was $44,673, while the median income for a married couple with a single child was $66,607. (8)

If the debtor's income is below the applicable median income level, then the means test evaluation goes no further, and there will be no presumption of abuse. (9) If the debtor's income is above the median income, then the debtor's income and expenses information is evaluated for purposes of the means test.

The evaluation of the debtor's monthly expenses is partially based on the debtor's actual expenses (for example, the debtor's monthly mortgage payment) and also on expenditure allowances from the Internal Revenue Service.

The debtor's allowed expenses are deducted from his or her monthly income. Whatever remains after those deductions is considered disposable income. If the debtor's disposable income exceeds either $10,000 or 25 percent of the debt owed, then the court will presume that granting the debtor a Chapter 7 would be abusive. (10)

The presumption of abuse may only be rebutted by a show of special circumstances that justify additional expenses or an adjustment of monthly income. (11) The adjustments to income and/or additional expenses must be documented and itemized, and the debtor must explain why they are necessary. (12) If the debtor fails to rebut the presumption of abuse, the case will either be converted to Chapter 13 or subject to dismissal.

The practical consequences of the means test

Contrary to popular belief, the means test actually prohibits relatively few debtors from filing for relief under Chapter 7.

According to a Congressional report by the U.S. Trustee's Program, a division of the Department of Justice, only about eight percent of Chapter 7 filers have incomes that are above the state median income. (13) Of those eight percent, only 10 percent had monthly disposable income of an amount sufficient to trigger the presumption of abuse under 11 USC section 707(b)(2)(A). (14)

Combining these two figures, it appears that less than one percent of Chapter 7 debtors are prevented from receiving a Chapter 7 discharge by the means test.

However, as noted by the report, this does not account for those debtors who file for relief under Chapter 13 because of an inability to file under Chapter 7. The Justice Department's report noted that 26 percent of Chapter 13 debtors are above the state median income. A portion of that 26 percent may have been Chapter 7 debtors if not for the means test.


If the intention of BAPCPA was to render Chapter 7 bankruptcy unavailable to consumer debtors, it has failed. 11 USC section 707(b)(2) has created a mathematical formula by which cases may be evaluated for the possibility of abuse, but the formula only turns its scrutiny upon debtors with incomes above their state's median.

Because the majority of debtors earn incomes below the median, relatively few are affected by the means test. Chapter 7 bankruptcy thus remains a viable avenue of relief.

(1.) The changes BAPCPA brought to the Bankruptcy Code are summarized in The New Bankruptcy Law: A Consumer Lawyer's Guide, by James J. Haller and William A Mueller, 93 Ill Bar J 454 (Sept 2005).

(2.) Through the course of these pages, those petitioning for relief under the provisions of the Bankruptcy Code will be referred to as "debtors."

(3.) ISBA's Legal Health Checkup, Today, Filing for Bankruptcy is More Difficult, p. 9, available at legalhealthcheckup.html.

(4.) 11 USC [section] 707 was subject to significant amendments with the passage of the BAPCPA. Those changes are reviewed in the article named in note 1.

(5.) As in, "Does the debtor have the means to repay this debt?"

(6.) 11 USC [section] 521(a)(l)(B)(ii).

(7.) 11 USC [section] 101(10A).

(8.) Means testing income data is available at http://

(9.) The fact that there is no presumption of abuse does not prevent the court from finding that granting a discharge to the debtor might be abusive under 11 USC [section] 707(b)(l).

(10.) 11 USC [section] 707(b)(2)(A)(i).

(11.) 11 USC [section] 707(b)(2)(B)(i).

(12.) 11 USC [section] 707(b)(2)(B)(ii).

(13.) U.S. Department of Justice, Executive Office for United States Trustees. Report to Congress: Impact of the Utilization of Internal Revenue Service Standards for Determining Expenses on Debtors and the Court, July 2007, p 3, available at ust/eo/public_affairs/reports_studies/docs/Rpt_to_ Congress_on_IRS_Standards.pdf.

(14.) Id at 4.

Matthew Benson <> lives, writes, and practices law in DuQuoin.
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Author:Benson, Matthew M.
Publication:Illinois Bar Journal
Date:Sep 1, 2009
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