The Bankruptcy Means Test: Do You Qualify for Chapter 7?
Filing for bankruptcy is a significant decision that often comes after considerable financial distress. One of the most common forms of personal bankruptcy is Chapter 7, which can discharge many types of unsecured debt, offering a financial reset.
However, not everyone qualifies for this type of relief. In North Carolina, as in the rest of the country, one of the first steps in a Chapter 7 filing is taking what's called the “bankruptcy means test.” Connecting with our staff at Cannon Law Offices, PLLC in Greenville, North Carolina, is a great way to better understand the purpose and implications of this process.
This test plays a central role in determining whether your income and financial situation meet the criteria for a Chapter 7 filing under bankruptcy law. Rather than a general overview, this discussion will focus closely on how the means test works, why it's required, and what it means for those considering bankruptcy in North Carolina.
What Is the Bankruptcy Means Test?
The bankruptcy means test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Its goal is to limit Chapter 7 filings to individuals who truly can’t pay back their debts.
The test compares your income and expenses to determine whether you have enough disposable income to repay a portion of what you owe through Chapter 13, which involves a repayment plan. If your income is below a certain threshold, you pass the test automatically and can proceed with Chapter 7.
If your income exceeds the threshold, additional calculations are required to determine whether you still qualify. This process involves evaluating expenses allowed under bankruptcy law and subtracting them from your monthly income to assess your financial condition.
Income Thresholds in North Carolina
The first part of the test compares your average monthly income over the past six months to the median income for a household of your size in North Carolina.
These figures are updated periodically and can be found on the U.S. Trustee’s website or through bankruptcy court sources. As of the latest data, median income levels in North Carolina might look something like this:
One-person household: $59,000
Two-person household: $75,000
Three-person household: $88,000
Four-person household: $100,000
If your household income falls below the median for your family size, then you pass the means test without needing further analysis. If your income is higher, you're required to complete the second part of the test, which examines your expenses and disposable income.
Calculating Disposable Income
For those who must complete the second part of the means test, bankruptcy law requires a detailed assessment of both income and allowable expenses. The allowable expenses are based partly on Internal Revenue Service standards, not necessarily your actual monthly spending. Allowable deductions may include:
Housing and utility costs
Food and household supplies
Clothing and personal care
Health insurance and medical expenses
Car payments and transportation costs
Childcare expenses
Mandatory payroll deductions (such as taxes and retirement contributions)
Alimony and child support
Once these are subtracted from your income, what's left is considered your disposable income. If this figure exceeds a certain amount, then bankruptcy law may presume that you have enough funds to repay a portion of your debt and thus should file under Chapter 13 rather than Chapter 7.
When the Presumption of Abuse Arises
If your disposable income is high enough to cover a meaningful portion of your unsecured debt over five years, the bankruptcy court may determine that filing for Chapter 7 is an abuse of the system. This is known as the “presumption of abuse.” However, the presumption can be rebutted if you can show special circumstances such as:
A serious medical condition
Recent job loss with no prospect of new employment
Expenses related to caring for an ill or disabled family member
Each of these must be documented carefully and justified with supporting evidence. In North Carolina courts, decisions regarding special circumstances are handled on a case-by-case basis. Knowing whether or not the means test is right for you can help avoid this potential pitfall.
Who Needs to Take the Means Test?
Not every person filing for Chapter 7 needs to complete the means test. Bankruptcy law provides some exceptions. If your debts are primarily business-related rather than consumer-related, you're typically not required to take the test.
Similarly, disabled veterans whose debts were incurred during active duty or while performing a homeland defense activity may be exempt. Still, most individuals filing for Chapter 7 in North Carolina will need to complete the test. Failing to do so correctly can result in dismissal of your case or a requirement to convert to Chapter 13.
The Importance of Accurate Documentation
Documentation is crucial when completing the means test. You’ll need pay stubs, bank statements, tax returns, and a clear record of your expenses. In North Carolina, bankruptcy trustees frequently review means test submissions for errors or omissions.
Submitting incomplete or inconsistent information can delay the process or lead to more serious consequences. Here are some key documents you'll likely need:
Six months of pay stubs or other income records
Recent tax returns (usually the past two years)
Statements for all financial accounts
Records of any irregular income (bonuses, side jobs, etc.)
Proof of allowable monthly expenses
It's important to complete these steps precisely as outlined in the bankruptcy law process. Courts expect clear and honest disclosures, despite the location in which you’re filing.
The Local Differences of Filing in North Carolina
While bankruptcy law is federal, local procedures and court expectations vary by district. North Carolina is divided into three districts: Eastern, Middle, and Western. Each district has its own set of procedures, standing trustees, and local forms.
Although the means test itself doesn’t change, how trustees and courts interpret certain expenses may differ slightly depending on which part of the state you're in.
For example, allowable transportation costs in rural areas of North Carolina might be viewed differently than in cities like Charlotte or Raleigh. Local trustees may also have different expectations when it comes to supporting documentation or how they interpret specific deductions.
Common Reasons for Failing the Means Test
Failing the means test doesn’t necessarily mean you did something wrong—it may simply reflect your current financial situation. That said, some common reasons why people don’t qualify for Chapter 7 in North Carolina include:
Reporting inaccurate income (e.g., forgetting to include freelance or seasonal work)
Taking unallowable deductions (e.g., luxury expenses or personal loans to friends)
Underestimating average household income by failing to include a spouse's earnings
Filing before a significant income drop is fully reflected in the six-month average
These missteps can be avoided by preparing carefully and using official guidelines laid out in bankruptcy law.
What Happens If You Don’t Qualify?
If the means test shows that you can’t file under Chapter 7, Chapter 13 might be an option. Chapter 13 doesn’t discharge debt outright but creates a payment plan that usually lasts three to five years, according to the United States Courts. Many North Carolina residents who don’t qualify for Chapter 7 end up pursuing Chapter 13 as an alternative.
Chapter 13 has its own eligibility requirements based on the amount of secured and unsecured debt you owe. It's structured differently and involves a trustee distributing your payments to creditors. The decision to pursue this route often comes down to what you’re trying to protect—such as a home or vehicle—and your regular monthly income.
The Importance of Timing
Timing can significantly affect your eligibility under the means test. Because the test considers the previous six months of income, waiting until after a job loss or major reduction in income can help you qualify. In North Carolina, where economic conditions can vary greatly between urban and rural areas, these changes in income are especially relevant.
If you expect a significant change to your financial situation—such as a pending layoff or medical event—waiting a few months to file might result in a different outcome on the means test. However, this decision involves risk, particularly if you're facing foreclosure or wage garnishment.
The bankruptcy means test plays a central role in Chapter 7 eligibility and reflects a nationwide shift in bankruptcy law aimed at reducing misuse of the system. In North Carolina, the process follows the federal structure but may be influenced by local court expectations and regional economic conditions.
Those considering Chapter 7 must prepare thoroughly, paying close attention to income, expenses, and timing. While the means test may seem like just another procedural step, it has significant implications for whether you can discharge your debts through Chapter 7 or need to explore other options under bankruptcy law.
Consult with an Attorney From Our Firm
Knowing how the means test works and what to expect can make a substantial difference in the outcome of your case. Working with an experienced bankruptcy law attorney can help. Our firm in Greenville, North Carolina, serves clients throughout the Pitt County area, including Beaufort County, Craven County, Lenoir County, Martin County, and Greene County. Reach out to our staff at Cannon Law Offices, PLLC today to schedule a consultation.