In 2005 the government decided to overhaul the bankruptcy program in an effort to prevent abuse and fraud. The Bankruptcy Abuse Reform Act does this by looking at a person’s income for the last six months and comparing it to incomes in the rest of the state. For people who want to file bankruptcy, for people seeking bankruptcy this means they have to pass a Means Test or a Median Test to see if they qualify to file their petition.
Most people won’t even have to take a Means Test because they’ll easily pass the Median Test. A Median Test looks at your income for the past six months and compares it to the median income in your state, if it’s below the median then you are eligible to file a Chapter 7 bankruptcy . The state median is basically an average income across the entire state.
If your income is higher than the state median then you’ll have to take the Means Test. The purpose behind the means test is to prevent people who make more than the state median income from walking away from their debts with a Chapter 7 bankruptcy and instead puts them into a Chapter 13 bankruptcy repayment plan. The Means Test actually follows a very complicated set of rules and formulas. Basically it reviews your income over the past six months divides it by six to come up with a monthly income, this amount has to be less than a predefined amount established by the state.