Bankruptcy Chapter 7 Means Test
Before you can file a bankruptcy case, you have to decide which type of bankruptcy best suits your needs. If you want to file Chapter 7 bankruptcy, you will probably have to take what we call the Bankruptcy Chapter 7 Means Test, a mathematical formula designed to determine if you can afford to make payments in a Chapter 13 case.
The Bankruptcy Means Test Is a Gateway to Filing a Chapter 7 Case
Until 2006, individuals were more or less free to choose which type of bankruptcy would help them accomplish their goals, as long as they were not using the bankruptcy system to defraud their creditors. In 2005 Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Through BAPCPA, Congress intended to cut down on what it viewed as abusive practices by people filing Chapter 7 straight bankruptcy when they could afford to pay some of their debt in a three to five year Chapter 13 repayment plan. To accomplish this goal, Congress included the Means Test as a provision in BAPCPA.
The Presumption of Abuse
Even though we call this a test, there is no passing or failing as such. Instead, the test tells us whether there is a “presumption” that you would be abusing the bankruptcy system if you filed a Chapter 7. If the presumption arises, you may still be able to file a Chapter 7 case, but you may be required to go before the judge to explain why you are not taking advantage of your creditors.
The Elements of the Means Test
Filing a bankruptcy case requires a lot of financial information. You disclose your income, expenses, all the debts you owe and the type and value of all your real and personal property. The Means Test is primarily concerned with your income and expenses. The Means Test comes in two parts.
First, the formula compares your family income to the median income of families of the same size in your state. The median is the point at which there is the same number of families with a higher income as there is with a lower income. If your income is less than the median income for your state, congratulations! You’ve “passed” the test; or more accurately, the presumption of abuse does not arise. You are free to file under Chapter 7.
You can access a chart with the median income of each state on the US Trustee’s website. https://www.justice.gov/ust/means-testing
If, however, your family income is higher than the median for you state, you will move on to the second part of the Means Test. In Part II, the formula will deduct your reasonable and necessary expenses from your family income. Some deductions are for the actual expenses you incur, but some are based on national or regional averages. Once your expenses are deducted, the Means Test calculates whether you have a meaningful amount of disposable income at the end of the month. If your disposable income is small enough (or in negative territory), the presumption of abuse does not arise. In effect, you have passed the test. If, however, your disposable income is high enough, the presumption of abuse arises, and you will likely be shut out of filing a Chapter 7 case.
If you take the Bankruptcy Chapter 7 Means Test, and the presumption of abuse does not arise, you will generally have no difficulty filing a Chapter 7 case. If you take the Means Test and the presumption of abuse does arise, you can still file a Chapter 7 case, but you will probably draw a motion from your Chapter 7 trustee or your trustee’s boss, the US Trustee, asking the court to dismiss your case for abuse. A qualified and experienced consumer bankruptcy attorney like Gregory J. Wald can help you determine if any of your personal circumstances would allow you to file a Chapter 7 case when the presumption of abuse arises.
People Who Are Exempt from the Means Test
Although the Bankruptcy Chapter 7 Means Test will apply for most filers, some are exempt by law. These include
- Filers with primarily business-related (non-consumer) debt.
- Veterans with a disability rating of at least 30%, or who were discharged because of a disability that occurred in the line of duty, and who incurred most of their debt while on active duty.
- Filers who are in the military reserves or the National Guard and are called to active duty before they file their bankruptcy case.
- Those who file a Chapter 11 case.
The Means Test and Chapter 13
If you “fail” the Bankruptcy Chapter 7 Means Test, you might consider filing a Chapter 13 case. Although it will take three to five years to complete, you will still receive many benefits. This includes protection from your harassing creditors, no interest accrual on most debt and discharge of most debt that remains unpaid at the end of the plan. You may even be able to use Chapter 13 to change unfavorable terms on a car loan.
Those who file Chapter 13 repayment plan cases are not subject to the Means Test itself. But, Chapter 13 debtors must complete two forms that serve a somewhat similar function.
First, you will file Form 122-C1, Statement of Your Current Monthly Income and Calculation of Commitment Period. This statement, which compares your family income to your state’s median income, determines whether you will enter into a three-year or a five-year repayment plan. If you are above the median, you will stay in Chapter 13 for five years. If below the median, you will only be required to stay in three years, although you can propose a plan to last up to five years if necessary.
Second, you will file Form 122C-2 Chapter 13 Calculation of Your Disposable Income. As it states, this form deducts your reasonable and necessary expenses to determine your minimum Chapter 13 plan payment.
To Learn More About the Bankruptcy Chapter 7 Means Test, Contact Gregory J. Wald Today
The Means Test is complicated. An experienced consumer bankruptcy lawyer like Gregory J. Wald knows how to maximize each step for your benefit. Contact him today at (952) 921-5802 for your free consultation.