The new bankruptcy law of 2005 (BAPCPA) contained something called the “Means Test.” The means test is used to determine whether you qualify to file Chapter 7 bankruptcy. If you fail the Means Test, you may still file for bankruptcy protection under Chapter 13 bankruptcy.
The Means Test is a two-part test that is really just a formula that boils down down to income and expenses.
The first part of the Means Test is simple and straightforward. Your current monthly income is compared to the median monthly income in your state for a household the same size as yours. If your income is less than the median income, you pass. Period. You’re done. You don’t need to complete the rest of the Means Test. You can file for Chapter 7.
If your income is higher than the median income, it doesn’t necessarily mean that you can’t file for Chapter 7 bankruptcy; it just triggers the second step in the test which is significantly more complex.
The second part of the Means Test is actually a two-part test in and of itself. First, you subtract your allowed monthly living expenses (determined by IRS guidelines) from your monthly income to come up with your monthly “disposable income.” If your projected disposable income over the next five years totals less than $6,000 ($100/month), you pass the Means Test and can file under Chapter 7.
If your projected disposable income over the next five years is greater than $10,000, you fail the Means Test and will not be allowed to file Chapter 7.
If your projected disposable income is between $6,000 and $10,000, yet another calculation is required. This one compares your disposable income over the next five years to a percentage of your unsecured debt to determine whether any significant repayment to your creditors is possible. If your disposable income over that five years is greater than 25% of your unsecured, non-priority debts, you fail the Means Test and cannot file under Chapter 7. If your disposable income over a five year period is less than 25% of your unsecured, non-priority debts, you pass the Means Test and can filed Chapter 7 bankruptcy.
Of course, just because you qualify under the Means Test does not necessarily mean you should file for Chapter 7 bankruptcy — merely that you can. Any decision to file for Chapter 7 bankruptcy should be made only after considering alternatives and consulting with a knowledgeable bankruptcy lawyer.
If you don’t pass the Means Test, you may still file bankruptcy but are limited to using Chapter 13 bankruptcy which is a 3 to 5 year debt repayment plan. In a Chapter 13 bankruptcy, your payment plan is based upon what you can afford to pay your creditors, not on what your creditors want you to pay.
This has been a brief summary of the Means Test. There are special circumstances and other issues that can have an effect on the Means Test.
If you are struggling with debt problems and being harrassed by bill collectors and would like to know more about how bankruptcy may be able to help you, contact me today by phone or email to schedule a FREE initial consultation. I would count it a privilege to be able to visit with you in a relaxed and confidential environment where I’ll answer all of your questions in plain English and give you the straight scoop on the pros and cons of bankruptcy as related to your specific situation.