Prior to the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the bankruptcy Means Test did not exist. The purpose of the Means Test was to help prevent bankruptcy fraud by preventing individuals with higher income levels from filing a Chapter 7 bankruptcy to discharge their unsecured debts. Creditors lobbied congress to pass the Means Test as a way to require individuals who DO have disposable income to pay back some of their debts in a Chapter 13 case instead of filing for a Chapter 7. Requiring those with disposable income to pay back a portion of their debts in a Chapter 13 case provides a safeguard for creditors and reduces bankruptcy fraud.
How is the Bankruptcy Means Test Calculated?
There are several chapters of bankruptcy available to individuals. A few debtors who have substantial debts and assets file under Chapter 11; however, most individuals file under Chapter 7 or Chapter 13 of the Bankruptcy Code. The bankruptcy Means Test was designed to limit the number of debtors who file under Chapter 7 but have the ability to pay back some of their debt through a Chapter 13 plan.
The first section of the Means Test compares the debtor’s gross monthly income to the median income for a household of the same size in the same location as the debtor’s residence. If the debtor’s income is below the median, the debtor can file a Chapter 7 case without completing the other sections of the Means Test. If a debtor’s income is above median, this does not necessarily mean he cannot file under Chapter 7. He must continue with the following sections of the Means Test.
The remaining sections of the Means Test determine the debtor’s disposable monthly income after deducting allowable expenses from the debtor’s gross income. Actually, this is a good way to chip away at the debtor’s income to bring it down to a level that is acceptable for filing a Chapter 7 case.
Expenses that are allowed include but are not limited to charity donations, income taxes, childcare expenses, life & health insurance, some secured debt payments, educational expenses for minors, and involuntary employment expenses or deductions. Completing this section of the Means Test is much more complex and requires the assistance of an experienced bankruptcy attorney in order to ensure that the expenses claimed do not exceed the federal guidelines and that all available expenses are utilized.
In many cases, once the attorney has imputed the expenses and allowable deductions into the Means Test, the debtor shows negative disposable income, or a very small positive. If that is the case the debtor is permitted to file under Chapter 7.
What Happens if I Fail the Bankruptcy Means Test?
“Failing” the first section of the Means Test does not necessarily mean you cannot file under Chapter 7, as we discussed above. However, if after completing the entire Means Test, results show you have more disposable income than is permitted under a Chapter 7 case, you can still find debt relief through the filing of a Chapter 13 case.
Often, when a person is looking for bankruptcy relief, they have their minds set on filing a Chapter 7. We understand that a Chapter 7 case does not take as long to complete and does not require payments to a bankruptcy trustee each month, but Chapter 13 bankruptcy cases do have several benefits that debtors do not have in a Chapter 7 case. For example, debtors in Chapter 13 cases can protect non-exempt assets, pay income taxes over a 5-year period without additional penalties accruing on the balance, put student loans on deferment during the bankruptcy, pay past due domestic support obligations through the plan to avoid jail, etc.
Filing a Chapter 13 is not a bad thing. In some cases, it is the best alternative for some people who need the assistance of the bankruptcy process. To determine if you pass the Means Test and to discuss which chapter of bankruptcy is best for you to file to meet your specific financial needs and goals, we urge you to contact our office to schedule a free bankruptcy consultation. Our bankruptcy attorneys answer all of your bankruptcy questions and explain the entire bankruptcy process, including the pros and cons of filing bankruptcy, so you can make an informed decision how to proceed with your debt relief plan.
