Automatic Stay in Bankruptcy and the Means Test Explained: the short version

In summary

This is part 2 of 2 of our guide to When You Can’t Pay. It picks up where Debt Collection and Bankruptcy: What to Do When You Can’t Pay leaves off, and it is written to stand on its own: the key ideas are restated where you need them.

The stay. Filing a petition “operates as a stay” of almost every collection effort — lawsuits, garnishments, calls and letters — from the moment of filing (11 U.S.C. §362(a)). The logic is collective: once a court is dividing what a debtor has among all creditors, no single creditor may race ahead. To stop repeat filings used only to stall, a new case filed within a year after a dismissed one gets a stay of just 30 days unless the court extends it (§362(c)(3)).

The means test. Chapter 7 is steered away from filers who could repay. The test starts with “current monthly income,” the average of all income over the six full calendar months before filing (§101(10A)), annualized and compared with the state median for the household’s size. For the running household’s $75,000 salary and cases filed on or after July 15, 2026, the one-earner median is $66,837 in Texas and $69,876 in Florida — so it must complete the full test — but $79,253 in California and $88,585 in Washington, where it would not. Above-median filers deduct allowed expenses; if enough income remains to repay creditors, Chapter 7 is presumed abusive and Chapter 13 is the route. The same debts can therefore mean a quick discharge in one state and a five-year plan in another.

The running household owes $15,000 across cards at 22% and still earns its $75,000 salary. Illustrative assumptions: the DMP cuts the rate to 8% over 60 months, agency fees excluded; in settlement, no payments are made while money is saved, balances grow at 22% for 18 months (late fees ignored), then settle at 50% with a fee of 20% of the $15,000 enrolled, and the forgiven amount is taxed at 22% because the household is not insolvent; Chapter 7 costs the $338 court fee plus an illustrative $1,500 attorney fee and $50 for the two required courses.

The settlement row: $15,000 × (1 + 0.22 ÷ 12)^18 = $20,802.26; half is $10,401.13, and the forgiven $10,401.13 × 22% = $2,288.25 of tax (taxable income rises from $51,800 to $62,201, still in the 22% bracket). Funding $10,401.13 + $3,000 = $13,401.13 by month 18 takes $13,401.13 ÷ 18 = $744.51 a month — more than twice the DMP payment.

The flip points. Settlement beats the DMP in dollars only while the settlement stays below about 65.8% of the grown balance; at 50% the cushion is $18,249.00 − $15,689.38 = $2,559.62, which one lawsuit’s costs or a creditor that refuses to settle can erase. The DMP’s $304.15 is $304.15 ÷ $4,687.80 = 6.5% of monthly take-home pay ($2,163.60 × 26 ÷ 12), so for this household bankruptcy would be disproportionate. The balance tips toward a bankruptcy consultation when the DMP payment outgrows the budget: the household’s entire 20% savings share, $432.72 × 26 ÷ 12 = $937.56 a month, could carry a 60-month plan at 8% on about $46,239 of debt. Above roughly that much unsecured debt (less if rates are not cut), a DMP stops being workable.

The sequence above assumes ordinary unsecured debts owed by you alone. These situations change who can collect, how, or for how long.

“Always pay something to show good faith” is sound on a current account. On an old debt in collections it can backfire: a small payment may restart the statute of limitations and turn a debt that could no longer be sued on into one that can. Before paying an old collection account, get validation, confirm the date of last payment, and check your state’s limit.

A missed payment is recoverable; a judgment, a garnishment, or a restarted limitations clock is far harder to undo. This section is education, not legal advice: state law varies, and a nonprofit credit counselor (see the U.S. Trustee Program’s approved list) or a local legal aid office can review your specific situation at little or no cost.

How to avoid it: file an answer by the court’s deadline, even if you owe something; contact legal aid; ask the plaintiff to prove ownership and the amount, and raise the statute of limitations if it has run.