In 2005, the Bankruptcy Abuse and Consumer Protection Act became a federal law. Although the act has many provisions, one of the most notable is the bankruptcy means test. Designed to curb bankruptcy fraud, in which high-earning individuals could rack up a great deal of debt and then wipe it out in a Chapter 7 bankruptcy, the means test is something that everyone who files for Chapter 7 must pass. Fortunately for honest debtors, the majority of people caught in a true financial crisis are likely to pass the test.
What Is the Means Test?
In essence, the means test is an assessment of your income and expenses that determines the amount of disposable income you have available to pay your debts. Those who pass the means test are qualified to file for Chapter 7 bankruptcy. Some types of income, most notably Social Security payments, do not count as income for purposes of the means test. However, if you live with roommates, you may be required to count the money that they contribute to household expenses.
The means test considers your income over a six-month “look back” period. You will be asked for your income in each of those six months, which are then averaged to determine your monthly income. This amount may be higher or lower than what you currently make. For many debtors, the means test is very cut and dried. That is because debtors who make less than the median household income for their area are presumed to pass the test. The median household income is adjusted for your family size, which means that debtors with more dependents have a higher threshold under which they are eligible to file.
What If My Income Is Higher Than the Median?
If your income is higher than the median for your area, adjusted for your family size, you may still qualify to file for Chapter 7 bankruptcy. You will need to fill out a more detailed means test, which carefully balances your monthly income against your monthly expenses. In some categories, you are able to claim your actual expenses, even if they are higher than average. For other categories, you are only allowed a certain dollar limit per month, whether or not you actually pay more.
In addition, some people with relatively high incomes may qualify for Chapter 7 bankruptcy due to a unique financial picture. For example, high mortgage or car payments, or being significantly behind on either your mortgage or car loan, might make you eligible due to deductions. If you are a disabled veteran who incurred the bulk of your debts during active service, a member of the military reserves who recently served active duty, or a business owner with primarily business rather than consumer debts, special rules apply.
If your income has significantly decreased recently, it may be to your advantage to wait to file. Since the means test is based on a six month “look back,” it does not necessarily reflect your current financial picture. Borrowers who have recently fallen on hard times might want to wait until the six month period better reflects their new reality.
The means test can be complicated and tricky to understand, especially if your financial picture is complex. It is best to use the services of a qualified bankruptcy attorney who can help you sort through your records and accurately answer the questions. However, online calculators can get you started, and help you make a preliminary estimate as to whether or not you are likely to qualify.
Chapter 13 Bankruptcy
If you do not pass the means test, Chapter 13 bankruptcy is another option. It is open to everyone, regardless of income. Chapter 13 bankruptcy does not wipe out your debts, but it does restructure them according to your ability to pay. Depending on your personal financial picture, you may be required to pay only a portion of what you owe. Chapter 13 is also a good option for those with sizeable assets that would not be exempted under a Chapter 7 bankruptcy, as well as for those who are far behind in mortgage or car payments. A qualified bankruptcy attorney can review your financial picture and help you decide whether Chapter 13 is the best option for you.
If you are ready to take the first steps toward financial freedom, call the Law Offices of David M. Offen today at (215) 625-9600 to schedule your free initial consultation. We’re here to help you every step of the way.