Bankruptcy Means Test
In 2005, Congress added means testing to the bankruptcy law in an effort to minimize abuse of the Chapter 7 process. The means test diverts people who the government has determined are able to repay some of their debt away from Chapter 7 and into Chapter 13 bankruptcy, which includes a mandatory repayment period. For individuals who are looking to have their debts discharged so they can start fresh, the means test is a significant and oftentimes unnecessarily stressful hurdle.
When is means testing required?
Most individuals who want to file Chapter 7 bankruptcy will need to go through the full means testing process as there are only a handful of exemptions. These exemptions include:
- Cases where the debts are primarily consumer debt. If the majority of the individual’s debt is business, tax, or other non-consumer debt, means testing is not required.
- Members of the National Guard and Reserves who are on active duty are exempt from the test if they have been activated for at least 90 days.
- All disabled veterans are exempt from testing.
All other filers who want to file under Chapter 7 will have to undergo means testing.
How does means testing work?
The full means test is a multi-step process, but many filers do not have to go beyond the first step to determine eligibility for Chapter 7 bankruptcy.
The first step of the means test compares a filer’s current monthly income to the median income for a household of the filer’s size, in the state where he or she is filing. Although this sounds straight forward, current monthly income is actually a defined term, so precise calculation is required. The filer should have as much of his or her financial information available for review at this time so that a qualified bankruptcy attorney can assist in this process.
The second part of the first step – comparing the client’s current monthly income as calculated above to the filing state’s median income for a household of the filer’s size – is more straightforward, but does require some research. The necessary median income data comes from the Census Bureau. The Department of Justice maintains a link to the appropriate data on its website.
If the individual’s current monthly income is less than the median income for a household of his or her size in the state where he or she is filing, the person passes the means test and can file for Chapter 7 bankruptcy.
If the individual’s current monthly income is greater than the specified median income, it is necessary to go through the entire means testing process to determine if he or she is Chapter 7 eligible. The final steps of the test are much more complicated.
First, to calculate “disposable income”, “allowed” monthly expenses are subtracted from the individual’s current monthly income. “Allowed” expenses depend on the individual’s household size and geographic area. The exact number to use in the calculation comes from the IRS, and can be obtained on the Department of Justice website.
How the individual’s “disposable income” compares to a certain amount set by the government determines whether he or she passed the means test. If the individual’s calculated disposable income is greater than or equal to the certain amount set by law, he or she will not be allowed to file under Chapter 7. Furthermore, if he or she files under Chapter 13 he or she will likely be put on a 5 year repayment plan rather than a 3 year plan since his or her current monthly income is above the state median.
If you are considering filing for chapter 7 bankruptcy and are concerned about how the means test will affect your particular situation, a qualified bankruptcy attorney can help.