There has been much doom and gloom written about the bankruptcy means test under the new laws and how much more difficult it's going to be to file Chapter 7. It's true that there are more hoops to jump through under the new laws and it's true that the bankruptcy means test will result in some people having to file chapter 13 instead of Chapter 7. However, for the vast majority of filers Chapter 7 is still available with very little extra effort!
Proprietary research by Best Case Solutions shows that more than 85% of current Chapter 7 debtors will have income below their state medians for their household size*, so for most cases, the full bankruptcy means test will not have to be completed and the debtor can file Chapter 7. Note that if one does not pass the 1st. stage of the bankruptcy means test that there is another bankruptcy means test to be conducted which will allow most of the 15% remaining to also file Chapter 7. Reference
*Research was done by Best Case Solutions, Inc., on 11,013 consumer cases filed in 44 states and DC June 15 - July 6, 2005, with the Best Case OneTouchT Electronic Filing System. Data examined was from filed cases only, and thus public record.
Ed Flynn, Executive Office for United States Trustees and Gordon Bermant, Burke, Virginia reported in their study of a sample of 1,938 cases that the bankruptcy means test resulted in only two Chapter 7 petitions that would not be allowed under the new law.
Are you eligible to file Chapter 7?1st. Stage of the Bankruptcy Means Test: Check to see if the monthly average of your last 6 months gross income is below the median income for your state. If it is you can file Chapter 7: State Median Incomes
2nd. Stage of the Bankruptcy Means Test: If your income is slightly higher than your state's median income you may still be able to file Chapter 7. Your bankruptcy lawyer will be able to make this calculation and also advise on allowable expenses that can be used in the calculation.
Two extra hoops to jump through
In 2005 congress passed a new law making it harder to simply walk away from your debt by filing a bankruptcy. This law is called The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 Pub L. No. 109-8, 119 Stat. 23 (April, 20th 2005) "BAPCPA". Among its various creditor weighted protections, the "Means Test" is probablly the most potent one. This means test makes it far more difficult to simply liquidate and walk away from your debt.
- A person filing Chapter 7 bankruptcy will have to take an approved Credit Counseling Course within the 6 months before he or she files. Your bankruptcy lawyer can set this up for you or you can find a list of approved credit counselors here. In some cases the course can be taken over the Internet.
- An approved Financial Management Course will have to be completed before you can be discharged. Your bankruptcy lawyer can set this up for you or you can find a list of approved credit counselors here.
In order to file Chapter 7 bankruptcy, you must prove your need by passing the means test.
A major part of the Chapter 7 means test involves comparing a person's income to the median income in their state.
If your median income is less than your state's median income level then you probably qualify to file Chapter 7 bankruptcy. If your income is above this level, then you may need to examine Chapter 13 bankruptcy.
Whatâ€™s the Chapter 7 Means Test?
Before you file Chapter 7 bankruptcy, you must complete the Chapter 7 means test, which is used to determine if you qualify to file.
The means test isnâ€™t like the exams you saw in school. Rather, the means test looks at your debts, income and assets. Because Chapter 7 bankruptcy is such a powerful tool for erasing debt, the courts want to ensure that it is only used by people truly in need.
The means test is a straightforward test and most debtors qualify to file Chapter 7 bankruptcy.
The test is divided into two parts and both focus on your income and expenses.
Chapter 7 Bankruptcy Means Test Steps
Step 1: Assess Monthly Income
The first part of the test compares your monthly income (which is determined by a worksheet that the court will provide) to the median income for your area and household size. If your monthly income is at or below your state median income level, the means test is overâ€”there is no presumption of abuse and you can file for Chapter 7 bankruptcy.
The median will vary fairly significantly according to your geographic location and the size of your family. Depending on the state you live in, the 2006 median income for a family of four ranged from $52,217 to $92,205. The U.S. Trusteeâ€™s Office has a page on their web site with the most up-to-date median incomes.
Step 2: Deduct Allowable Expenses
If you find that your income exceeds the state median, it doesnâ€™t necessarily mean that you wonâ€™t be able to file under Chapter 7. This just means you must move on to the second part of the test. During the second step, you will deduct certain allowable expenses from your monthly income based on IRS standards. The remaining amount over after these allowable expenses is your disposable income. Then you will multiply that number by 60 to determine how much disposable monthly income youâ€™ll have over the next five years.
If the total turns out to be less than $6000, then you have passed the means test, and you may file bankruptcy under Chapter 7, since there is no presumption of abuse. On the other hand, if the total is over $10,000, then there is a presumption of abuse, though you will be given the chance to include additional necessary expenses to reduce your monthly income.
However, if your total disposable income for the five-year period falls between $6000 and $10,000, then you must make one more calculation. For this step, you will take your expected disposable income over the next five yearsâ€”that number you calculated falling between $6000 and $10,000â€”and compare it to the total amount of your non-priority unsecured debts.
If your disposable income is less than 25% of the total of those debts, there is no presumption of abuse, and you therefore qualify to file under Chapter 7. Just as before, you will have the opportunity to show special circumstances that justify the inclusion of additional expenses.
Chapter 7 Bankruptcy Means Test Summary
In short, the means test works like this:
Compare your monthly income to the state median:
If your income is at or below the state median, the presumption does not arise and you â€œpassâ€ the means test;
If your income is above the state median, go on to calculate your disposable income for the upcoming five year period.
Calculate your disposable income over the upcoming five years:
If that number is below $6000, the presumption does not arise and you â€œpassâ€ the means test;
If that number is above $10,000, the presumption does arise, and you can file under Chapter 7 only with a showing of special circumstances;
If that number is between $6000 and $10,000, calculate 25% of your outstanding unsecured, non-priority debts.
Multiply your outstanding unsecured, non-priority debts by .25:
If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts, the presumption arises and you can file under Chapter 7 only with a showing of special circumstances;
If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts, you "pass" the means test and can file under Chapter 7.
Even if youâ€™ve passed the means test, you should know that your bankruptcy trustee can still throw your case out for abuse if he deems that your particular case warrants it.
In any case, your bankruptcy lawyer can give you more specific advice about what kinds of circumstances might cause a trustee to challenge or dispute your bankruptcy case.