The Bankruptcy Means Test and What to Know about It
Filing for Chapter 7 bankruptcy can be a lifesaver for those drowning in debt and in need of a fresh financial start. However, not everyone is eligible for Chapter 7 bankruptcy. The Bankruptcy Means Test was introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to prevent high-income individuals from filing for Chapter 7 bankruptcy and abusing the system. The test determines if you have enough disposable income to pay back at least a portion of your debts through a Chapter 13 repayment plan.
Today, we will delve into the details of the Bankruptcy Means Test and how it determines your eligibility for Chapter 7 bankruptcy.
What Is the Bankruptcy Means Test?
The Bankruptcy Means Test is a two-step process to evaluate your financial situation and determine if you qualify for Chapter 7 bankruptcy. The test compares your income, expenses, and family size to the median income for a similarly-sized household in your state. If your income is below the median, you automatically pass the means test and qualify for Chapter 7 bankruptcy. If your income is above the median, you will need to complete the second part of the test, which evaluates your disposable income and expenses.
Step 1: Median Income Comparison
The first step of the Bankruptcy Means Test involves comparing your income to the median income for your state. To calculate your income, you will need to determine your average monthly income for the six months prior to filing for bankruptcy. This includes all sources of income, such as wages, salaries, tips, bonuses, commissions, self-employment income, rental income, pension, and any other income you receive.
You then compare your average monthly income to the median income for a household of your size in your state. These figures are published by the U.S. Trustee Program and are updated periodically. If your income is below the median, congratulations, you qualify for Chapter 7 bankruptcy! If your income is above the median, you will need to move on to the second step of the test.
Step 2: Disposable Income Calculation
If your income is above the median for your state, you will need to complete a more detailed analysis of your finances. This involves calculating your disposable income by deducting your monthly expenses from your average monthly income.
The Bankruptcy Means Test uses a combination of national and local standards for allowable living expenses, which include housing, utilities, food, clothing, and transportation expenses. Some of your actual expenses, such as mortgage or rent payments, child support, and taxes, will also be considered.
After deducting these expenses from your income, the remaining amount is your disposable income. If your disposable income is below a certain threshold (currently $7,700 over five years or $128.33 per month), you qualify for Chapter 7 bankruptcy. If your disposable income is between $7,700 and $12,850 over five years ($214.17 per month), a more in-depth analysis will be required to determine whether you can file for Chapter 7 or if you should proceed with a Chapter 13 repayment plan.
Exceptions to the Bankruptcy Means Test
There are exceptions to the Bankruptcy Means Test, which may allow you to file for Chapter 7 bankruptcy even if you do not pass the test. These exceptions include the following:
- Disabled Veterans: If you are a disabled veteran with a disability rating of 30% or more and your debts were primarily incurred during active duty or homeland defense activities, you may be exempt from the means test.
- National Guard and Reservists: If you are a member of the National Guard or military reserves and have been on active duty for at least 90 days, you may be temporarily exempt from the means test for a limited time after your active duty ends.
- Non-consumer Debts: If your debts are primarily business-related or non-consumer debts (such as taxes, business loans, or investment property loans), you may be exempt from the means test.
Get Tested for Bankruptcy Means Today
The Bankruptcy Means Test is an essential step in determining your eligibility for Chapter 7 bankruptcy. If you are considering filing for bankruptcy, it is crucial to understand the means test and seek the guidance of an experienced bankruptcy attorney to help navigate the process. Bankruptcy can provide the fresh financial start you need, but only if you qualify and follow the proper legal procedures.
Angela R. Owens is a skilled debt defense attorney catering to clients in Plano, Allen, Frisco, Dallas, and nearby areas, focusing on debt settlement and bankruptcy law. If you are looking for a bankruptcy attorney, work with us today!