What the Chapter 7 Means Test Is

The Chapter 7 means test is the financial screening mechanism used to determine whether a debtor qualifies for Chapter 7 bankruptcy or must instead file under Chapter 13. The purpose of the test is to ensure that individuals who have the ability to repay a meaningful portion of their debts through a repayment plan do not use Chapter 7 as a shortcut to eliminate those debts entirely.

In simple terms, the means test compares your income to the median income for households of similar size in Texas. If your income falls below that median threshold, qualification for Chapter 7 is usually straightforward.

How the Income Calculation Works

The means test looks at average income during the six months prior to filing bankruptcy. This means the test does not look at only your current paycheck. Instead, the court averages income received over the previous half‑year.

This often surprises people during consultations. Someone may have lost a job recently or experienced declining business income, yet their six‑month average still reflects higher earnings from earlier in the year.

For business owners or individuals with variable income, this calculation can significantly affect eligibility.

Texas Median Income Thresholds

The median income thresholds are adjusted periodically. They vary depending on household size. Larger households are allowed higher income levels before failing the means test.

If a household income falls below the Texas median, the debtor normally qualifies for Chapter 7 without further analysis.

If the income exceeds the threshold, the calculation moves to the second stage of the means test.

What Happens if Income Is Above the Median

When income exceeds the median threshold, the means test subtracts certain allowed expenses. These include standardized living expenses based on IRS guidelines as well as some actual expenses such as:

After subtracting these allowed expenses, the remaining amount represents disposable income. If that disposable income is low enough, Chapter 7 may still be available.

Business Owners and the Means Test

Small business owners frequently assume they cannot qualify for Chapter 7 because their historical income appears high. In reality, the means test can still allow qualification if revenue has declined.

For example, a Texas business owner who earned strong income earlier in the year but recently closed their business may still qualify if the six‑month income average drops below the threshold or if expenses reduce disposable income sufficiently.

Real Client Scenario

During one consultation, a client believed they would fail the means test because they had earned approximately $90,000 annually before their business collapsed. However, once the six‑month average was calculated, their income had dropped significantly due to the closure of their company.

After analyzing allowable expenses and income history, the client qualified for Chapter 7 and was able to eliminate substantial unsecured debt.

Why the Means Test Matters

The means test determines the path of a bankruptcy case. Passing the means test allows the debtor to file Chapter 7 and potentially eliminate qualifying unsecured debt within a few months. Failing the means test may require filing Chapter 13, which involves a repayment plan lasting three to five years.

Understanding the means test early helps individuals determine whether Chapter 7 is a viable option before starting the filing process.