Bankruptcy Means Test and Debt Relief
For many Michigan families struggling with mounting bills and relentless creditor calls, finding a way out can feel impossible. Bankruptcy offers a legal path to a fresh start, but understanding who qualifies for each option is not always straightforward. The bankruptcy means test plays a central role in determining which chapter is right for you, measuring your income and expenses against official standards set by the IRS and Census Bureau. This guide explains what the means test is, how it works in Michigan, and why getting every detail right is essential for your best chance at debt relief.
Key Takeaways
| Point | Details |
|---|---|
| Bankruptcy Means Test | The means test determines eligibility for Chapter 7 bankruptcy by comparing income to state median levels and assessing disposable income after deducting allowable expenses. |
| Importance of Accurate Reporting | Providing complete and precise financial information is crucial; inaccuracies can lead to case dismissal or forced conversion to Chapter 13. |
| Impact of Expense Allowances | The means test uses standardized expense allowances from the IRS, which may not match actual expenditures, influencing disposable income calculations. |
| Choosing the Appropriate Chapter | Passing the means test does not automatically favor Chapter 7 over Chapter 13; considering asset retention and long-term goals is essential. |
What is the Bankruptcy Means Test?
The bankruptcy means test is a formula designed to determine whether you qualify for Chapter 7 bankruptcy relief and whether the court might dismiss your case as an abuse of the system. Think of it as a financial screening tool. When you file for Chapter 7, the court wants to know one critical thing: do you actually need this relief, or could you realistically pay back at least some of your debts?
That’s where the means test comes in. It compares your income against your state’s median income and then measures what money you have left after accounting for necessary living expenses. The goal is straightforward—prevent people with the ability to repay from using Chapter 7 as a shortcut.
The means test operates in two distinct steps, and understanding the difference is crucial for Michigan filers. First, the test compares your average monthly income over the past six months against the state median income for your household size. If your income falls below Michigan’s median for your household, you pass this initial stage and typically qualify for Chapter 7. You can breathe easier at this point.
But if your income exceeds the median, you move to step two. Here’s where it gets more detailed. The court calculates your disposable income by subtracting allowable monthly expenses from your income. These allowable expenses aren’t arbitrary—they come from standards set by the IRS and Census Bureau, not based on what you actually spend. You might spend $800 on groceries, but the means test might allow only $600. This distinction matters because the test uses these standardized figures rather than your real-world spending to determine if you’re abusing the system.
Completing the means test requires honesty and precision with specific bankruptcy forms that use your personal financial data. You’ll need to provide six months of pay stubs, bank statements, and detailed information about your household expenses. The forms are formal documents you file with the court, and accuracy here shapes your entire bankruptcy outcome.
Many Michigan residents underestimate how technical this process becomes. One incorrect figure can trigger additional scrutiny or even lead the trustee to object to your Chapter 7 filing, forcing you into a Chapter 13 repayment plan instead. The means test formula applies mainly to Chapter 7 cases to determine eligibility, though the underlying principle of demonstrating genuine financial hardship applies across bankruptcy types.
For Chapter 13 filers in Michigan, the process differs somewhat because you’re proposing a repayment plan rather than seeking discharge, but the means test still influences how much you’ll need to pay back over your plan period.
Pro tip: Gather your last six months of pay stubs and monthly expense records before meeting with a bankruptcy attorney, as having this documentation ready accelerates the means test analysis and helps you understand exactly where your case stands.
How The Means Test Determines Eligibility
The means test follows a straightforward but detailed process that Michigan bankruptcy filers need to understand. It starts with a single question: what is your current monthly income? The court calculates this number by taking your average monthly income over the past six months, which is why gathering those pay stubs matters so much. This isn’t what you earn today or what you hope to earn next year.
It’s your historical average, plain and simple. Once the court determines your current monthly income, it compares that figure against the state median income for your household size in Michigan. This comparison happens automatically and is the first critical decision point. If your income falls below Michigan’s median, you pass the means test immediately. Congratulations. You qualify for Chapter 7 without further analysis. The court won’t dig deeper into your expenses or calculate whether you have disposable income. You’re eligible to discharge your debts through Chapter 7, assuming other requirements are met.
But here’s where the process becomes more demanding for those whose income exceeds the median. The means test calculates current monthly income and deducts allowed expenses to determine if you have disposable income available to repay creditors. This is where the IRS and Census Bureau standards come into play. The court doesn’t care what you actually spend on housing, transportation, food, or utilities.
Instead, it uses standardized expense allowances based on national averages for your county and household size. You might spend $500 monthly on car insurance, but the allowance might be $450. You might spend $1200 on rent, but the allowance could be $1100. These differences accumulate quickly. The court subtracts these allowed deductions from your current monthly income to calculate your disposable income. If that number is low enough, you still qualify for Chapter 7. If it’s higher, the trustee may object to your petition, arguing you have enough income to fund a Chapter 13 repayment plan instead.
The eligibility determination ultimately depends on how much disposable income you have relative to your total debt. Your state and household size determine which expense allowances apply to your calculation, making this inherently personal to your situation. Consider a Michigan household with two adults and one child. If your current monthly income is $5200 after the six-month average, and your allowed expenses total $4800, you have $400 in monthly disposable income.
Multiply that by 60 months, and you’re looking at $24,000 in potential repayment capacity. If your total unsecured debt is $30,000, that disposable income might be enough to push you toward Chapter 13. However, the calculation involves many moving parts, and small errors can shift the outcome significantly.
This is why working with a bankruptcy attorney who understands Michigan’s specific median income figures and expense allowances becomes so valuable. They can walk you through your exact numbers before you file, showing you precisely where you stand and whether Chapter 7 or Chapter 13 makes more sense for your situation.
Pro tip: Calculate your six-month income average before your initial consultation, and bring a list of your actual monthly expenses so an attorney can compare them against the IRS allowances and give you a realistic assessment of whether the means test will help or hinder your case.
Income and Expense Calculations Explained
Getting your income calculation right is foundational to the entire means test. The court uses a specific method that differs from what you might expect. Your current monthly income isn’t calculated by taking what you earned last month or what your paycheck looks like today. Instead, it’s your average monthly income over the six calendar months immediately before you file for bankruptcy. If you file in September, you look back at March through August and add up all your gross income from those months, then divide by six.
This approach smooths out variations and gives the court a realistic picture of your typical earnings. The figure includes wages, salary, self-employment income, rental income, benefits, and any other regular money coming in. It’s brutal for people whose income recently dropped because the court uses the higher historical average, but it’s fair for those whose income recently spiked because it accounts for their typical earning pattern.
Expense calculations, by contrast, follow standardized IRS guidelines that vary by location and household composition. The means test uses IRS national and local standards for food, clothing, healthcare, housing, and transportation expenses. These aren’t arbitrary numbers. The IRS publishes these allowances based on actual household spending data, and they get updated regularly.
Here’s the practical reality: if you live in Detroit, your allowed housing expense differs from someone in rural Michigan because cost of living varies. If you have a family of four, your food allowance is higher than for a single person. The test accounts for these real differences. But here’s the catch. If the IRS standard for your situation is $300 monthly for food and you actually spend $450, the court still deducts only the $300 from your income.
You don’t get credit for spending more than the standard, even if you can prove it’s necessary. However, you can request adjustments for specific expense categories if you can demonstrate that your actual necessary expenses exceed the standard allowance due to special circumstances like medical conditions or disability.
The actual calculation process requires entering detailed information into official bankruptcy forms with precision. You’ll complete Form 106 (Summary of Your Assets and Liabilities and Certain Statistical Information), Form 106Sum (Summary of Your Financial Information), and Form 106Dec (Declaration About Your Debts). These forms aggregate your income and expenses using the standardized calculations, and errors here can derail your case.
Transportation costs provide a good example of how detailed this gets. The expense calculation accounts for transportation by including vehicle payments, insurance, fuel, and maintenance based on IRS standards. If you own two vehicles, the court typically allows an expense for one vehicle and may allow a second if you can justify it. If you use public transportation, different numbers apply. The entire process demands accuracy because the trustee and creditors scrutinize every line item.
A $50 discrepancy might seem small, but multiply it across 60 months, and you’re looking at $3,000 that could shift whether you qualify for Chapter 7 or get pushed toward Chapter 13. This is why many Michigan residents benefit from having an experienced attorney review their calculations before filing. They catch errors, identify areas where you might qualify for adjustments, and ensure you’re presenting the strongest possible case to the court.
Pro tip: Organize your income documents by month before meeting with an attorney, and create a spreadsheet listing your actual monthly expenses so the attorney can compare them against IRS standards and identify any areas where you might qualify for adjustments above the baseline allowances.
Chapter 7 vs. Chapter 13 Considerations
The means test result doesn’t just determine whether you qualify for bankruptcy. It fundamentally shapes which chapter you’ll file under, and that choice affects nearly everything about your bankruptcy experience. If you pass the means test, Chapter 7 becomes available to you. If you fail it, Chapter 13 likely becomes your only realistic option.
But here’s what many Michigan residents don’t realize: passing the means test doesn’t automatically mean Chapter 7 is the best choice for your situation. Some people who pass the test actually benefit more from Chapter 13. The means test creates eligibility, but it doesn’t dictate your decision. You need to understand what each chapter actually requires from you and which aligns with your financial goals.
Chapter 7 and asset liquidation work hand in hand. When you file Chapter 7, a trustee can liquidate your nonexempt property to pay creditors, and you receive a discharge of remaining unsecured debts. This process typically takes four to six months. Sounds quick, but here’s the catch.
Not all your property disappears. Michigan law provides exemptions that protect certain assets from liquidation. Your primary residence has significant protection under Michigan’s homestead exemption. Your vehicle, up to a certain value, is protected.
Your retirement accounts, personal items, and household furnishings are largely protected. You only lose nonexempt property, which for many Michigan residents means very little. After liquidation, your unsecured debts are discharged, meaning creditors can’t pursue collection. You walk away owing nothing on those debts. This fresh start is powerful, but it requires that you pass the means test.
Chapter 13 offers a fundamentally different approach. Instead of liquidation and discharge, you propose a court-approved repayment plan spanning three to five years. Chapter 13 lets you retain all your property while reorganizing debt payments, and the means test doesn’t control your eligibility but instead shapes how much you repay under your plan.
The key difference is control. You keep your home, your car, and your possessions. You work with the court to create a realistic budget that allows you to catch up on missed payments while continuing regular payments on debts you want to keep. This matters enormously if you’re behind on your mortgage or car loan.
Chapter 7 can’t help you keep a vehicle you’re financing if you can’t afford the payments. Chapter 13 lets you catch up over five years. For Michigan homeowners facing foreclosure, Chapter 13 can be a lifeline because it automatically stops foreclosure and gives you time to reorganize your finances.
The decision between chapters requires thinking beyond just eligibility. Consider your goals. Do you want a quick discharge and fresh start, accepting that some nonexempt property may be liquidated? Chapter 7 might be right. Do you want to keep your home, your car, and your possessions while restructuring your debts into manageable payments? Chapter 13 makes more sense.
Do you have significant nonexempt assets that Chapter 7 would liquidate, but Chapter 13 would let you keep? The means test result is just the starting point. Some Michigan residents who pass the means test still choose Chapter 13 because they want to keep property they’d lose in Chapter 7. Others who might be borderline on the means test might benefit from Chapter 13’s more flexible approach to income.
This is where working with a bankruptcy attorney becomes invaluable. They assess your means test results, review your assets and goals, and recommend the chapter that actually serves your situation best rather than just the one you technically qualify for.
Pro tip: Don’t assume that passing the means test means Chapter 7 is your best option. Discuss with an attorney whether Chapter 13 might actually help you keep assets, stop foreclosure, or better align with your specific financial situation and goals.
Here’s a quick comparison of Chapter 7 and Chapter 13 bankruptcy features as they relate to Michigan residents:
| Feature | Chapter 7 Bankruptcy | Chapter 13 Bankruptcy |
|---|---|---|
| Asset Protection | Liquidates nonexempt assets | Retains all property |
| Debt Resolution | Discharge most unsecured debts | Repayment plan for 3-5 years |
| Process Duration | Usually 4-6 months | Typically 3-5 years |
| Eligibility | Based on means test result | Available regardless of means test |
| Impact on Home/Car | May lose if nonexempt | Can catch up on missed payments |
Common Mistakes and How to Avoid Them
Michigan residents filing for bankruptcy make predictable mistakes on the means test, and many of these errors are preventable with proper preparation and attention. The most common mistake is misreporting or omitting income sources. You might think that only your main job counts, but the court captures all income. Side gigs, rental income from a property you own, spousal income if you’re married filing jointly, unemployment benefits, disability payments, and even child support you receive all factor into your current monthly income.
One Michigan filer recently failed to report sporadic freelance income she received over the six-month lookback period because she considered it irregular. The trustee discovered it during review and filed an abuse motion, forcing her to either convert to Chapter 13 or have her case dismissed. The lesson: list every income source, even if you think it’s small or temporary. The court uses the six-month average anyway, so a few months of freelance work get averaged in. Being thorough now prevents problems later.
The second major mistake involves mishandling or forgetting expense deductions. Many filers either overstate their actual expenses, hoping to lower their disposable income, or understate them by not knowing what deductions are available. Here’s the critical point: the means test requires you to use IRS and Census Bureau standards for allowable deductions, not your actual spending.
You can’t claim expenses outside these standards without specific justification. But within the standards, you’re entitled to the full allowance even if you spend less. If the IRS standard for food is $350 monthly and you only spend $250, you claim the $350. Conversely, if you spend $450, you can only claim the $350 unless you can document why your situation qualifies for an adjustment.
Many filers either miss available deductions entirely, costing themselves money, or claim expenses that fall outside the standards and face pushback from the trustee. The transportation category is particularly tricky. If you own a vehicle with a remaining loan, you can claim both a vehicle payment and operating costs. If you own it outright, you can claim only operating costs. Get this wrong, and you either overstate or understate your legitimate deductions.
A third critical mistake is using outdated IRS standards or failing to account for location-specific adjustments. The IRS publishes updated expense standards regularly, and using old numbers creates inconsistencies. Additionally, housing and transportation standards vary by county in Michigan. Detroit has different allowances than rural areas because the cost of living differs.
Using statewide averages instead of county-specific figures can shift your means test result significantly. Some filers complete their calculations months before filing, then file using old data without updating to current standards. The bankruptcy trustee and courts use current figures, and discrepancies trigger scrutiny or objections. You’ll complete your means test forms using specific data from specific months, so ensure those figures reflect what was current during that time period.
Another frequent error is the incorrect completion of official forms. The bankruptcy forms have specific lines for specific information, and mixing up which line contains which data creates cascading errors throughout your calculation. Form 106 Sum, Form 106 Dec, and Schedule I and J all interconnect, and an error in one place ripples through the entire document.
Many filers try to complete these forms themselves using online guides or templates, and small mistakes in where data goes cause the trustee to request amendments or file objections. You might think your income is low enough to pass, but a data entry error makes it appear higher, creating a false objection to your case. The solution is straightforward: have a bankruptcy attorney carefully review your income and expense reporting to catch errors before filing. They know exactly what goes where and how different numbers interact. This review typically costs far less than fixing a case after the trustee objects.
Below is a summary of common mistakes Michigan residents make on the means test, along with how to avoid them:
| Mistake | Impact on Bankruptcy Case | How to Avoid |
|---|---|---|
| Omitting income sources | Case dismissal or conversion | List all recent income types |
| Using incorrect expense figures | Objections by the trustee | Use current IRS/official standards |
| Incomplete or misfiled forms | Delays and extra scrutiny | Have the attorney review the documentation |
| Not updating for local standards | Calculation errors | Use county-specific expense data |
Pro tip: Gather all six months of pay stubs, recent tax returns, and bank statements at least two weeks before your attorney appointment, and request a detailed pre-filing review where your attorney walks through every line item of your means test calculation so you understand exactly which numbers go where and why.
Take Control of Your Financial Future with Expert Bankruptcy Guidance
Struggling to navigate the complexity of the bankruptcy means test can feel overwhelming, especially when your ability to qualify for Chapter 7 relief hangs in the balance. This article highlights how critical the means test is in determining whether you can obtain a fresh start or if a Chapter 13 repayment plan is your best option. If you are facing these tough questions about income, expenses, and which bankruptcy chapter fits your unique situation, you are not alone. Many Michigan residents encounter confusion and uncertainty when trying to understand the nuances of the means test and how it impacts their debt relief options.
With Frego & Associates, you can work with a team that understands Michigan law, IRS standards, and local median income figures intimately. Our experience in handling Bankruptcy cases means we help you avoid common mistakes, organize your income and expense documents correctly, and find the chapter that truly aligns with your financial goals. Do not wait until the means test becomes a barrier. Contact us today at 1-800-646-0075 for a free debt relief consultation and get a clear, personalized bankruptcy analysis designed to protect your assets and rebuild your credit. Your fresh start begins now.
Frequently Asked Questions
What is the bankruptcy means test?
The bankruptcy means test is a financial assessment used to determine if an individual qualifies for Chapter 7 bankruptcy. It compares your average monthly income against the median income for your household size in your state and evaluates your disposable income after necessary expenses.
How does the means test impact my eligibility for Chapter 7 bankruptcy?
If your average monthly income falls below the state median, you pass the means test and can typically file for Chapter 7. If it exceeds the median, the test will calculate your disposable income after allowable expense deductions to check for qualification or potential need for Chapter 13 instead.
What types of income are considered in the means test?
The means test considers all sources of income, including wages, self-employment income, rental income, unemployment benefits, and child support. It calculates your average monthly income based on the six months before filing.
Can I claim my actual expenses on the means test?
No, the means test allows only specific allowable expenses set by IRS standards, not your actual spending. If your expenses exceed these standards, you may need to provide documentation to justify the higher amounts.
