The Bankruptcy Abuse Prevention and Consumer Protection Act was signed into law by President George Bush in 2005 and this made some sweeping changes to the US Bankruptcy Code. ‘Means test’ was one of those changes. This test determines whether or not your income is low enough to file Chapter 7 and it keeps the higher income filers from discharging their debt and disregarding their ability to repay a portion of their liabilities through Chapter 13.
Means test - Are you presumed to be abusive?
The BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) of 2005 introduced the means test to analyze whether or not the petitioner who is filing for bankruptcy is presumed to be abusive. In case the petitioner fails to pass the means test, he will straightaway qualify for Chapter 13 under which he has to make payments to his unsecured creditors over a stipulated time period of about 3-5 years. However, if he shows that he is facing special financial circumstances, the presumption may be invalidated. Having to appear for the Chapter 7 means test doesn’t demand you to be penniless in order to use this particular bankruptcy case. You can earn a substantial amount and yet qualify for Chapter 7 if you have another hefty expense like high mortgage installments.
How does the Means Test work in Chapter 7 bankruptcy?
The main goal of proposing the means test was to restrain the use of Chapter 7 bankruptcy to those who earnestly can’t pay off their debts. It is nothing but a series of financial questions aimed at the petitioner to check if he qualifies for Chapter 7. Prior to 2005, the filers were allowed to choose between Chapter 7 and Chapter 13 and it was seen that majority of them chose to discharge their debts through Chapter 7, irrespective of their income. Hence, the law was signed that demanded every Chapter 7 filer to sit for the means test before qualifying for the same.
The means test does this by subtracting some monthly expenses from your “present monthly income” (which is your average income for the last 6 months prior to filing bankruptcy), to derive at your “monthly disposable income”. The higher is this end-result, the lower will be chances of qualifying for Chapter 7 bankruptcy. Filers with predominantly consumer debts (and not business debts) can sit for the means test. In order to take the means test, you first need to determine whether or not your income is greater than or less than your state’s median income.
Step One: Comparison of your income against the median income
The first step of Chapter 7 means test is quite simple as it compares your income against the median income of your state for a family size same as yours. If your present monthly income is less than the median income for a family of your size in your state, you qualify for Chapter 7 bankruptcy. You’re done and you don’t require going through the rest of the means test. You straightaway file Chapter 7 bankruptcy! However, this should be kept in mind that the median income for your family might vary dramatically depending on the place you live and it is an attorney who can tell you whether or not you’re below or above the applicable median income.
Step Two: Calculating unsecured debts and disposable income
Filers, whose household income outstrips the state median income, the computations of the second step gets a bit more complex. You require calculating whether or not you have enough disposable income left over after repaying your “allowed” monthly expenses with which you can repay at least a portion of your unsecured credit card bills. The allowed monthly expenses are usually determined by IRS guidelines. If your total disposable income results to be more than a certain specified amount, you fail the means test and hence cannot file under Chapter 7.
Here too, the median income levels vary by state and household size as each county and region has varied allowed amounts for categories of expenses.
Leveraging the online means test calculator - Making calculations easier
Are you looking for a simpler way of determining your eligibility under the Chapter 7 case? If yes, you may use the online bankruptcy means test calculator. Once you enter the zip code, the calculator automatically uses the applicable income and other expense standards of your state, region or county to determine your eligibility. You might have to feed in some information on income and expenses, the calculator will reduce your trouble of looking through the income and expense figures within your area and also doing the calculations.
You pass the means test - What next?
Just because you’ve passed the means test, it doesn’t necessarily mean that you have to file Chapter 7 bankruptcy. Before you make this life-changing decision that has a drastic impact on your credit score, talk to a qualified and expert bankruptcy attorney. He might offer you some worthy alternatives to filing bankruptcy that could save money and grief.
Filing Chapter 7 bankruptcy with a lawyer - Is it more expensive?
Post 2005, the changes to the bankruptcy law added some complicated requirements to the process of filing bankruptcy. This made it more dear and stagnant for lawyers to represent their clients in different bankruptcy cases. The 2005 law also imposed certain additional requirements on lawyers, the main among them being the need for the lawyers to personally bear testimony to the information that their clients offer them. This clearly means that post bankruptcy changes, the attorneys require spending more time on the cases and hence they need to charge their clients accordingly.
Hence, if you’re someone who has been planning to file Chapter 7 bankruptcy, use the online means test calculator to determine whether or not you qualify for the same. Also make sure you complete credit counseling with an agency that has been approved by the United States Trustee’s Office. Get an idea whether you really need to file for bankruptcy before you take the plunge.