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What is the Texas “means test”?

| Mar 1, 2021 | Bankruptcy

Most Texans who are contemplating filing a petition with the United States Bankruptcy Court are concerned about keeping their house and discharging as many debts as possible. Many people who are filing a bankruptcy petition for the first time are surprised to learn that their choice between Chapter 7 (the liquidation of all debts) and Chapter 13 (preparing and satisfying a repayment plan) is not absolutely without conditions. In order to avail themselves of the benefits of Chapter 7, they must pass a “means test.”

What is the means test?

When Congress made significant amendments to the Bankruptcy Code in the 1980s, the lawmakers decided that only certain bankruptcy filers could use the statute to completely wipe out their debts. In order to prevent undeserving debtors from claiming the benefits of Chapter 7, the lawmakers created what is called the “means test.” In order to pass this test, a debtor must answer a number of questions about their financial affairs.

If the debtor has a median income that is greater than the Texas median income for households of the same size, the debtor must complete a means test calculation to determine whether the median income is too high for Chapter 7 eligibility. Once a person determines his or her median monthly income, that number is multiplied by 12 to determine the household’s annual median income. If the initial calculation of annual median income renders a person ineligible for Chapter 7, the debtor may adjust the income calculation by adding or subtracting various expenses. Completing the supplemental questionnaire is not unlike filling out a Form 1040 for the Internal Revenue Service.

If the debtor’s median income exceeds the median income for other Texas households, the debtor cannot use Chapter 7 and must instead file a petition under Chapter 13.

Seek guidance before a bankruptcy filing

Anyone contemplating bankruptcy may wish to consult an experienced bankruptcy lawyer for advice filing status, Chapter 7 eligibility, choosing exemptions and the like. A knowledgeable lawyer can also in completing the means test calculations if the debtor is intent upon filing under Chapter 7.