What is the Bankruptcy Means Test and how does it work?
The “means test” is used by the courts to determine eligibility for Chapter 7 or Chapter 13 bankruptcy and can be very complicated if you are not familiar with all of the somewhat convoluted calculations required by the Bankruptcy Code.
To apply the bankruptcy means test, courts first look at the debtor’s average income for the 6 months prior to filing and compare it to the median income for that state. If the income is below the median, then Chapter 7 is open as an option. If the income exceeds the median, the remaining parts of the means test come into play.
If the average income exceeds the median income for the size of the family, as calculated by the first part of the Means Test, the next step in the calculation is required. That part takes income, less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that figure times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations. The expenses that are used are based on a modified IRS standard.
If the income available for debt repayment over that 5-year period is $10,000 or more, then Chapter 13 will most likely be required. While someone earning above the state median, and with at least $166.67 per month of available income, will not automatically be denied Chapter 7, the Bankruptcy Code says that there is a “presumption of abuse” of the bankruptcy process. If a chapter 7 case is filed under those circumstances, the case will be subject to close scrutiny and might be dismissed.
So for example, if the court determines that you have $200 per month income above the IRS standard of living expenses, $200 times 60 is $12,000. Since $12,000 is above $10,000, you’re either stuck with Chapter 13 or, if you file under Chapter 7, you may have to prove why your case should not be dismissed by the court.
Good Representation is a Must
Having experienced legal counsel not only makes this process easier, it is almost a necessity. Good legal counsel, like a good accountant preparing tax returns, knows what can and cannot go into the bankruptcy means test. That knowledge may make the difference between passing the means test or failing it, or the difference between obtaining a discharge of your debts or having your case dismissed. If you are in Chapter 13 as a result of the means test, good legal counsel can help prevent you from paying your creditors any more than you absolutely have to under the law.
The standards for the bankruptcy means test can be complicated, especially when it comes to allowable expenses. In some cases, even determining whether something is “income” can be tricky. Certainly, the timing of filing has a lot to do with this analysis. Also, once it appears that there is a presumption of abuse and a Chapter 7 case appears headed for dismissal, knowing the standards of making that determination are extremely important. It is vital for a debtor that just cannot afford to fund a case under Chapter 13, but appears to “fail” the bankruptcy means test for Chapter 7 to have an attorney experienced in this important area.
What happens if you are above the median income but do NOT have at least $166.67 per month to pay toward your debts? Then the final part of the means test is applied. If the available income is less than $100 per month, then Chapter 7 again becomes an option. If the available income is between $100 and $166.66, then that so-called excess income is measured against the debt as a percentage, with 25% being the benchmark.
A big problem for most consumers is that their household budgets will not reflect the IRS approved numbers. So even if you think you are able to file Chapter 7 because you don’t have $100 per month to spare, the court may rule otherwise and still force you into Chapter 13 because some of your actual expenses may be disallowed.
The bankrupcy means test is necessary and, with an experienced attorney helping you along the process, is nothing to be overly concerned about. Knowledge is essential in the entire bankruptcy process, especially when it comes to getting past the bankruptcy means test.
Experienced Sacramento Bankruptcy Attorneys
We are experienced Sacramento Bankruptcy Attorneys. We have helped thousands of individuals and businesses get the relief they need from their creditors through the use bankruptcy by filing a Ch. 7, Ch. 13, credit card debt negotiation or debt settlement and have successfully dealt with adversary proceedings brought by difficult creditors. Our bankruptcy attorneys have achieved proven results and can give you the great legal advice and strategy needed to get you the results you want. Contact us today to schedule your complimentary attorney consultation by clicking HERE or by calling 916-999-1376. We look forward to helping you with all of your Sacramento bankruptcy needs.
