Bankruptcy Means Testing

September 18th, 2009 by Reed Allmand

One of the crucial changes to the Bankruptcy Code that kicked into effect on October 17, 2005 was the new “means test” requirement.

Courts use the means test to determine whether someone qualifies for Chapter 7 bankruptcy, or if they must file for Chapter 13 instead.  Chapter 7 is the type of bankruptcy most people think of when they hear the word bankruptcy.  This form of bankruptcy allows most if not all unsecured debts to be completely discharged.

Of course, any type of bankruptcy isn’t exactly easy to navigate, but Chapter 7 offers most debtors the chance to wipe out their debts in full and get a fresh start. Before the “Bankruptcy Abuse Prevention and Consumer Protection Act of 2005,” most consumers who filed for protection under Chapter 13 did it to avoid the loss of equity in their home or other property.  True that equity protection will continue to be a major reason for people to choose Chapter 13 over Chapter 7, the newer bankruptcy rules will force many people to file under Chapter 13 even if they have NO equity, since the means test takes into consideration the debtor’s income level.

When applying the means test, bankruptcy courts look at the debtor’s average income for the six-month period prior to filing the bankruptcy petition in comparison to that state’s median income. In cases where the debtor’s income falls below the median, then Chapter 7 is an option for that individual.  If, however, the income falls above that median level, the remaining steps of the means test must be applied.

Things get a little tricky at this point. A calculation is done that figures income minus living expenses (not including payments on the debts included in the bankruptcy), and multiplies that figure times 60.  The resulting figure is an approximate amount of income available over a 5-year period for repayment of the debt obligations.

If the debtor’s income available for debt repayment over the next 5 years is $10,000 or above, then he or she will automatically be denied Chapter 7.  As an example, if the court finds that someone has $200 per month of available income above their living expenses, and $200 times 60 is $12,000 (obviously above $10,000), that consumer is stuck with Chapter 13.

For those debtors above the median income but who do NOT have at least $166.67 per month to pay toward their debts, the final step of the means test is applied.  In cases where available income is less than $100 per month, Chapter 7 is once more an option. In cases where available income falls somewhere between $100 and $166.66, then it is measured against the debt as a percentage, and the debtor’s available income must exceed 25% of the total debt.

It’s pretty easy to see just how complex this whole process can be, which is why so many consumers consult with experienced bankruptcy attorneys in order to map their way through bankruptcy proceedings.  Trying to go it on your own is certainly an option–but not necessarily the best or safest choice.  Most bankruptcy attorneys offer a free consultation at least, so you should definitely consider having your case evaluated if nothing else.  It may well save you time, grief, and money in the long run!