Bankruptcy Means Test

In order to qualify for Chapter 7 bankruptcy, filers must pass the Chapter 7 bankruptcy means test. (There is no bankruptcy means test for those who choose to file under Chapter 13.) The means test requires legal knowledge and math; most sources, including the U.S. Bankruptcy Court, recommend working with a bankruptcy lawyer.

 

What's the Point of the Bankruptcy Means Test?

Introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, the Chapter 7 bankruptcy means test is designed to make sure that only those who cannot afford to repay some or all of their debts receive a Chapter 7 debt discharge.

Before the passage of BAPCPA, bankruptcy judges decided on a case-by-case basis who could file under Chapter 7.

 

How Does the Bankruptcy Means Test Work?

The test has three basic parts:

  • Part 1: Median Income Comparison. In this step, filers must compare their income to the median income of a household their size in their state. This requires access to updated state median income tables, which a bankruptcy attorney can provide. Those whose incomes are below the median automatically “pass” the means test and qualify for Chapter 7 bankruptcy. Those whose incomes are greater than the median move on to the second part.
  • Part 2: Disposable Income Calculation. In this step, filers must calculate their disposable income. This involves subtracting from total income the allowable monthly expenses designated by the federal government. Again, knowledge of these expense tables is essential (and a bankruptcy lawyer can provide that). Those who have less than $100 of disposable income per month (or less than $6,000 over a five-year period) pass the means test. Those with more than $10,950 of disposable income over five years do not pass. Those between the two move on to part three.
  • Part 3: Unsecured Debt Comparison. This calculation is made to determine whether a filer has enough disposable income to partially repay creditors. In this step, filers compare their disposable income over a period of five years to a percentage of their unsecured debt. Those with disposable income greater than 25 percent of their unsecured debt will likely have to file under Chapter 13 and repay creditors in part. Those with disposable income that totals less than a quarter of their unsecured debts will probably qualify for Chapter 7 bankruptcy.

Clearly, this test is not for the faint of heart. Because of its importance to the Chapter 7 bankruptcy process and the sophisticated calculations and comparisons required, many filers could benefit from the help of a bankruptcy lawyer familiar with the laws and necessary steps.

 

What if I Don't Pass the Bankruptcy Means Test?

First of all, don't panic. The bankruptcy means test only applies to Chapter 7 bankruptcy, so anyone who doesn't pass may still qualify for Chapter 13 bankruptcy protection.

In fact, not "passing" the bankruptcy means test can be seen as a good thing: those who don't pass typically make too much money to file under Chapter 7. And in the long term, making a little extra money is generally a good thing.

 

Why Doesn't Chapter 13 Bankruptcy Have a Means Test?

Chapter 13 bankruptcy works in a very different way from Chapter 7. Specifically:

  • Chapter 13 bankruptcy requires partial repayment of debts. Chapter 13 cases last for three to five years; during that time, filers make monthly payments to their bankruptcy trustee, who distributes the money among the filer's creditors. After several years, Chapter 13 filers catch up on some or all of their debts.
  • Chapter 7 bankruptcy requires no debt repayment. Chapter 7 cases move quickly – some finish in as little as four to six months. In this time, filers are not required to make repayments to their creditors. Instead, their eligible assets are liquidated to pay off debts and the court grants them a full discharge of their remaining eligible unsecured debt.

Because Chapter 7 bankruptcy requires no debt repayment, filers must prove that they cannot afford to repay their debts in order to qualify.

 

Where Do I Take the Bankruptcy Means Test?

If you're ready to find out whether you pass the means test, you can connect with a bankruptcy lawyer near you for guidance on how to find and apply the information you need.

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