It used to be that using Chapter 7 bankruptcy was easy to do, because bankruptcy law allowed bankruptcy courts in large measure of discretion when determining whether a petitioner was eligible for liquidation bankruptcy. Beginning in 2005, however, changes to the US Bankruptcy Code have made it more challenging to select Chapter 7 through the imposition of what has become known as the “means test.”

The main intent of the means test is to require debtors who make enough income to warrant participation in a Chapter 13 payment plan, which is better for creditors because it tends to allow them to recover more than they would under Chapter 7 liquidation.

Comparison of the debtor’s average monthly income to the state median family income: For New Jersey petitioners, the bankruptcy trustee will examine the period of six months prior to the filing of the petition for liquidation bankruptcy to compare the debtor’s income to the state’s median income. As long as the debtor’s income is the same or less than the median income, then the debtor will qualify for Chapter 7 relief. Income is not confined to employment -related wages or salary, but can also include income from separate businesses, interest and dividends, rental income, spousal and child support, unemployment and workers’ compensation, pension and retirement income and more.

Deduction of allowed expenses: If the debtor has income more than the New Jersey median income, the trustee will then deduct all allowed actual and standardized expenses to see whether this sufficiently reduces the amount of disposable income to the point where there is not enough left over to support a Chapter 13 payment plan.

The means test is not absolute: It has a number of exceptions and qualifications, including some circumstances that allow debtors to bypass the test altogether (for example, certain disabled veterans), and in other situations even if the debtor has income less than the median income the trustee may still decide that the debtor has enough income left over after allowable expenses to warrant the use of a Chapter 13 payment plan.

Anyone with questions about which type of bankruptcy protection he or she qualifies for can seek assistance from a bankruptcy attorney, who will be able to provide guidance on how the means test will be applied.