Understanding the Means Test and qualifying for Chapter 7 Bankruptcy in Virginia

Filing for bankruptcy can feel like a daunting process, but for those overwhelmed by debt, it offers a path to a fresh financial start. If you’re considering Chapter 7 bankruptcy, one of the first hurdles is the bankruptcy means test. This test determines whether your income and expenses allow you to qualify for Chapter 7, which discharges most unsecured debts. In this guide, we’ll explain the means test, provide Virginia-specific details, and share real-world examples to clarify how it works.

What is the Bankruptcy Means Test?

The means test evaluates your financial situation to determine if you have enough disposable income to pay back your creditors. If your disposable income (what’s left after deducting allowable expenses) is below a certain threshold, you qualify for Chapter 7 bankruptcy. Otherwise, you may need to consider Chapter 13, which involves repaying a portion of your debts over three to five years (36 to 60 months).

The Means Test when Qualifying for Chapter 7 involves two main steps:

Income Comparison: Compare your household income over the past six months to the Virginia median income for your household size.

Disposable Income Calculation: Subtract allowable expenses from your income to determine your disposable income. If it’s less than $200 per month, you likely qualify for Chapter 7.

Step 1: Calculating Your Income

The means test uses a six-month look-back period to calculate your average monthly income. Basically, the calculations take the prior income for the six months and double it. For example, if you file in July, the court considers your income from January to June. Income includes wages, business earnings, rental income, and other sources but excludes Social Security and VA Disability benefits. Also, the calculations include overtime, even if it has stopped or is not guaranteed. If you have seasonal income or an annual bonus, this calculation can vary dramatically from month to month. So it is critical that when you have income that varies month to month or week to week that you review your situation closely with your attorney.

Filing one month can have a dramatically different outcome than the next. For example, if you are salary and make $60,000.00 per year ($5,000.00 per month), usually your lookback income would show income from the prior six month was $30,000.00, so your calculated income is $60,000.00. However, if last month you received a $10,000.00 bonus, your income over the last six months would have been $40,000.00, which result in a calculated income of $80,000.00. Even if you will only will receive $70,000.00 for the year, the bonus will skew the numbers higher due to the lookback period.

The income numbers are adjusted twice annually and published by the US Trustee’s Office. To qualify automatically, your income must fall below the Virginia median income (as of November 2024):

• Household of 1: $75,756
• Household of 2: $95,482
• Household of 3: $98,253
• Household of 4: $116,328 (add $9,900 for each additional household member)

If your income exceeds these figures, you move to the next step.

Step 2: Calculating Allowable Expenses When Qualifying for Chapter 7

Allowable expenses are subtracted from your income to determine disposable income. These expenses must be reasonable and necessary, such as:

• Housing Costs: The average rent for the county or mortgage payments, property taxes, and insurance.
• Utilities and Food: Reasonable costs based on IRS guidelines. For a family of four, food and utilities typically total around $2,000/month.
• Medical Costs: Out-of-pocket medical expenses and health insurance premiums (e.g., $800/month for a family policy).
• Childcare: Daycare costs or babysitting expenses, even if it is high due to multiple children or care for a young child.
• Vehicle Expenses: Prorated car loan payments (~$500/month per car) and the IRS operating costs like fuel, insurance, and maintenance (~$300/month per car).
• Taxes: Payroll deductions for federal, state, and local taxes,

You may also include periodic expenses, such as prorated personal property taxes (e.g., $600/year divided into $50/month). Also, if you have certain priority debts, like priority taxes or past due support obligations, these debts can be used to lower your monthly income since these debts are required to be paid back. 

Due to these specifics, two filers may have two very different results, even if they have the same income and the same family size.

Examples Two Families with Similar Incomes: Chapter 7 vs. Chapter 13

Family 1: High Mortgage, Medical Costs, and Car Payments

Income: $150,000 annually ($12,500/month)

Household Size: 4 people (2 adults, 2 children)

Paycheck Deductions:

• Taxes: $2,400/month
• Health Insurance: $800/month

Expenses:

• Mortgage: $4,500/month
• Car Payments: $500/month for two cars
• Vehicle Operating Costs: $600/month
• Medical Costs: $500/month
• Childcare: $1,200/month
• Utilities and Food: $2,000/month

Disposable Income:

• Total Gross Income: $12,500
• Deductions: $3,200 (payroll deductions)
• Expenses: $9,300 (housing, cars, medical, childcare, etc.)
• Remaining Disposable Income: $12,500 – $3,200 – $9,300 = $0

Outcome: This family qualifies for Chapter 7 bankruptcy because their disposable income is below $200/month, largely due to their high mortgage, medical costs, and car-related expenses.

Family 2: Renters with Paid-Off Cars and Lower Expenses

Income: $150,000 annually ($12,500/month)

Household Size: 4 people (2 adults, 2 children)

Paycheck Deductions:

• Taxes: $2,600/month
• Health Insurance: $800/month

Expenses:

• Rent: $3,000/month
• No Car Payments: Both cars are paid off
• Vehicle Operating Costs: $550/month
• Medical Costs: $400/month
• Childcare: $1,200/month
• Utilities and Food: $2,000/month

Disposable Income:

• Total Gross Income: $12,500
• Deductions: $3,400 (payroll deductions)
• Expenses: $7,150 (housing, medical, childcare, etc.)
• Remaining Disposable Income: $12,500 – $3,400 – $7,150 = $750

Outcome: This family does not qualify for Chapter 7. Their disposable income of $750/month exceeds the threshold for Chapter 7, meaning they would need to file for Chapter 13 bankruptcy and repay creditors over time. The payment during the Chapter 13 will vary depending on things like assets, priority debt (i.e. recent tax debt, past due support obligations, etc.). If the disposable income is $750/month, this will usually mean that the Chapter 13 plan payment is similar to this amount. However, in the Chapter 13 analysis, some expenses are treated differently like non-required retirement contributions, bankruptcy attorney fees, child support that is received. As a result, in some situations, the Chapter 13 could be significantly lower.

It can be difficult for people to understand the means test, especially when  you see people making more money than you qualify for a Chapter 7 and you are required to file a Chapter 13. But, the bankruptcy process is so fact specific. A good bankruptcy lawyer is going to go over your details, review your expenses and help you with the process of understanding the Means Test and seeing why you qualify for Chapter 7 or why you do not. Sometimes, if you review the numbers, you can make changes to help you qualify for Chapter 7 bankruptcy or review what expenses you are missing that need to be accounted for.

Special Considerations and Exemptions

Means Test Exemptions:

• Non-Consumer Debt: If the majority of your debt is business-related or tax-related, you may bypass the means test.
• Disabled Veterans: Veterans with a 30% disability rating who incurred debts during active duty or homeland defense activities are exempt from the means test.

Non-Filing Spouse Deductions:

If a married couple is living together in Virginia, and only one spouse is filling, we have to include income from both spouses. Bankruptcy laws require that household income is taken into account. However, a important expense we can take when we have a non-filing spouse is using any debt payments the non-filing spouse has to lower the household disposable income. For example, if a husband files, but his wife has her own credit card payments, car loans, student loans, and child support payments, then we can use those to lower what is available to pay household expenses.

Expenses That Can’t Be Used by the Debtor on the Means Test and when Qualifying for Chapter 7:

There unfortunately are very common expenses that most people have every day that cannot be used on the Means Test and cannot be used in qualifying for Chapter 7.

• Debtor’s Credit card payments and unsecured loans.
• Debtor’s Student Loans.
• Luxury expenses or non-essential costs.
• Additional car payments, i.e. car payments for more than one car per driver in the household
• Tuition for college-aged students
• Tuition for private school, unless it is considered necessary child care, is necessary due to medical or physical disability, or amount is less than $189.58/child under 18.
• Business Losses
• Tax withholding that allows for refunds

Understanding Your Options

The means test is a critical tool for determining whether you qualify for Chapter 7 bankruptcy, but it can be complex. Even families with high incomes may qualify if they have substantial allowable expenses like a high mortgage, childcare costs, or medical expenses. However, those with higher disposable income may need to consider Chapter 13 bankruptcy.

The Means Test in Virginia is very unique to the state. Since the automatic qualifying income is based on the state median income, many individuals living outside of the major city areas (i.e. those outside northern Virginia, Richmond, and the Hampton Roads areas) benefit significantly because the high cost of living for the cities brings up the state average income.  For those living in northern Virginia, Richmond, etc., it can be more difficult to qualify automatically, but the Means Test accounts for more county specific expenses in the second step of the analysis. As a result, using a local attorney who understands the Means Test in Virginia and the high cost of living in northern Virginia becomes exceptionally important when qualifying for bankruptcy.

Virginia is also home to many individuals with military income; as a result, it is critical that any retired service member speak to an attorney that understands the Haven Act and how is applies to the Means Test. The Haven Act that allows Debtors to disregard VA Disability in their income calculations on the Means Test. This has a huge impact on both Chapter 7 and Chapter 13 cases.

Understanding the means test is an important part of qualifying for bankruptcy. If you’re unsure how the means test applies to your situation, contact us today for a free consultation. Our experienced bankruptcy attorneys can guide you through the process, ensuring you choose the best option for your financial future.

Attorney Ashley Morgan is an experienced bankruptcy lawyer; she and her office file hundred of bankruptcies a year and advise thousands of people on debt issues. Her office prides themselves on being very detail oriented and ensuring we have found all appropriate expenses to qualify their clients for the right chapter of bankruptcy. She helps hundred of people to understand the Means Test and qualify for Chapter 7 in Virginia each year.