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

Bankruptcy Fees & Expenses

Bankruptcy Abuse Prevention and Consumer Protection Act of 2005

Filing for bankruptcy protection is neither cheap nor easy. As a result of intense lobbying by the largest consumer finance companies, the Bankruptcy Code was amended in 2005 to make it more difficult for consumers to discharge their debts under Chapter 7. New eligibility requirements were established by The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. For example, an approved Credit Counseling Course must be completed before a bankruptcy petition may be filed. The United States Trustee has a list of approved credit counseling providers. The list is searchable by state. Many of the providers allow participation by phone or internet. The cost is about $50. In addition to proof of completion of the course, the bankruptcy petition must include proof of income for the sixty (60) day period prior to filing as well as a copy of the debtor’s last tax return with proof of filing.

Filing Fees

The bankruptcy court filing fee must also be paid at the time of filing of the bankruptcy petition (currently $299 for Chapter 7 and $274 for Chapter 13). In addition, if you are filing for Chapter 7 bankruptcy protection and using a bankruptcy lawyer, your lawyer will typically expect to have his or her legal fees and expenses paid in full prior to the filing. Depending on the complexity of the particular case, the legal fees may range from several hundred dollars to a few thousand. In a straightforward “no-asset” case without meaningful exempt property, no complex real estate issues and with no tax or child support problems, I would not be surprised by fee of $1,000 to $1,500. If your case is complicated (for example, you own a small business, have estate planning or tax issues, or have a significant amount of property that you intend to claim as exempt property), if your financial records are incomplete or in disarray or if you are filing jointly with your spouse, you should expect the legal fees to be higher.

Installment Payments

Most bankruptcy lawyers will allow you to pay their fees by installment while they are preparing your petition and schedules. In a Chapter 7 bankruptcy case, your bankruptcy lawyers will usually not file your petition until they have been paid in full. If you are paying your bankruptcy lawyers on installment, you can use this time to collect the financial information they will need to prepare the various bankruptcy forms and disclosure schedules to your petition.

With the bankruptcy court's permission, however, individual debtors may pay in installments. The number of installments is limited to four (4) and the debtor must make the final installment no later than 120 days after filing the petition. The bankruptcy court may extend the time of any installment, provided that the last installment is paid not later than 180 days after filing the petition. If you are filing jointly with your spouse, only one filing fee is required. Failure to pay these fees may result in dismissal of the bankruptcy case. If your income is less than 150% of the poverty level and you can establish that your disposable income is insufficient to pay the Chapter 7 filing fees, even in installments, the bankruptcy court may waive the fees. Submit Bankruptcy Form B3B with your Chapter 7 bankruptcy petition in order to request a waiver of the filing fee.

Chapter 7 & Chapter 13 Bankruptcy - Required Lists, Schedules, Statements and Fees

Bankruptcy Petition and Schedules

When considering a Chapter 7 or Chapter 13 bankruptcy filing, you should review and organize your financial information including pay stubs, bank accounts and bills for at least six (6) months before the filing. Bankruptcy Form B200 sets forth the documents and schedules that will need to be prepared and filed with the bankruptcy petition. As you read through the list, you should consider whether you will prepare the schedules on your own or will need the help of a well qualified bankruptcy attorney.

Required Financial Disclosure

In order to complete the required Bankruptcy Forms, including the debtor's petition, the statement of financial affairs and the schedules, the debtor must provide:

1. A list of all creditors and the amount and nature of their claims;
2. The source, amount, and frequency of the debtor's income;
3. A list of all of the debtor's property; and
4. A detailed list of the debtor's monthly living expenses (food, clothing, shelter, utilities, taxes, transportation, medicine, etc.)

Married individuals must report this information for their spouse whether or not they are filing a joint petition. Even when only one spouse is filing, the income and expenses of the non-filing spouse must be reported so that the bankruptcy court can properly evaluate the household's financial position.