The Bankruptcy Means Test

Calculating the Bankruptcy Means Test

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 introduced new eligibility requirements for individuals seeking bankruptcy relief. The amendments to the Bankruptcy Code established a “means test” to determine whether a debtor could file under Chapter 7 or Chapter 13 of the Bankruptcy Code. The bankruptcy “means test” requires a complex calculation of the debtor’s ability to repay debts that would otherwise be discharged in bankruptcy. To determine whether a debtor may file under Chapter 7 of the Bankruptcy Code, you must calculate the debtor’s average monthly income for the prior six (6) months. If the debtor’s monthly average income is below the median monthly income for the debtor’s state of residence, then the debtor is eligible for Chapter 7. If the debtor’s average monthly income is above the state’s median income, however, you must perform further calculations to determine eligibility. The second test requires an analysis of the debtor’s ability to repay some portion of his or her debts over time. In order to satisfy the second test, the debtor’s net disposable income may not exceed $100 per month. If the debtor’s net disposable income falls between $100 and $167 per month and this amount is sufficient to repay at least 25% of the debtor’s unsecured, non-priority debt over a five year period, then the debtor is not eligible to file under Chapter 7. If the debtor can repay $167 per month over a five (5) year period, for a total of $10,000, then Chapter 7 is also not available.

Median Income Data

The median income figures for each state, one of the components of the bankruptcy means test, are updated annually by the United States Census Bureau. The United States Trustee Program, which administers bankruptcy cases, makes certain adjustments for inflation and provides the data to be used in the means test calculations. The next update is expected on October 1, 2008. The figures for each state are available on its web site at http://www.usdoj.gov/ust/eo/bapcpa/20080317/meanstesting.htm Based upon the United States Census Bureau figures, the median income data for most states will increase from the prior year. Variance in the median income figures among the states is substantial. The “means test” calculations can be confusing and using the wrong data may result in the bankruptcy filing being dismissed, so be sure to confirm that you are using the current figures in your calculations.

Chapter 7 Liquidation

Chapter 7 Liquidation

There are two main types of bankruptcy proceedings. Chapter 7 is a liquidation, in which all non-exempt assets are sold and the proceeds paid to creditors and Chapter 13 is a reorganization, in which the debtor retains control of his or her property and repays creditors over time, pursuant to a repayment plan.

In a Chapter 7 bankruptcy, a bankruptcy trustee will be appointed to supervise the liquidation of the debtor’s assets and the distribution to creditors. The bankruptcy trustee will convert the debtor’s asset into cash and calculate the payments to creditors, if any. In most Chapter 7 bankruptcy cases, there is usually very little non-exempt property so there may not be any actual liquidation of assets. Unsecured creditors will generally receive little or no distribution. Most Chapter 7 bankruptcy cases are completed in just a few months after the bankruptcy petition is filed and the debtor receives a discharge (or debt forgiveness) for all dischargeable debts.

The Means Test

In 2005, the Bankruptcy Code was amended in order to make it more difficult for consumers to discharge their debts under Chapter 7. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 established new eligibility requirements for filing Chapter 7. There are two tests used to determine whether a debtor is eligible to file for Chapter 7 bankruptcy, an asset test and an income test. If the debtor has assets or income above specified levels, then the debtor is not eligible to file under under Chapter 7. Chapter 13 or Chapter 11 may be available.

Exempt Property

The bankruptcy code allows each state to designate certain property as excluded from the bankruptcy process. This is called exempt property. Most states allow a debtor to keep certain household necessities such as clothes, furniture, medical devices and a car. Some states will even allow a debtor to keep the equity in his or her home or land up to a certain number of acres. This is known as the homestead