Bankruptcy Means Test

In 2005, Congress amended the consumer bankruptcy laws requiring individuals seeking to file Chapter 7, or liquidation bankruptcy, to meet a maximum income requirement known as the “means test.” Each state has different income requirements.

There are, basically, two different types of consumer bankruptcies available to those who are not able to keep up with debt obligations; Chapter 7 bankruptcy and Chapter 13 bankruptcy.

Chapter 7 bankruptcy allows consumers to discharge such unsecured debt as credit card balances and medical bills. Chapter 13 bankruptcy allows consumers to consolidate their debts and make mandated monthly payments to pay off their debt over a three-to-five-year period.

In the 2005 amended bankruptcy laws, Congress made it more complicated for many debtors to file Chapter 7 bankruptcy. The idea was that too many debtors who could afford to pay some of their debt were filing under Chapter 7, effectively eliminating all of their debt. Congress, in response to this belief, sought to tighten the requirements for Chapter 7 and force those who could afford to pay some debts back to file under Chapter 13 consolidation.

Thus, post-2005, individuals expecting to file a Chapter 7 bankruptcy must demonstrate, through the application of the Congressionally-mandated “means test” that they do not have the ability to repay a minimum threshold of their debt.

Whether or not debtors have the wherewithal to repay at least a portion of their debt is determined by whether their earnings exceed the income level set by the state in which they reside. Acceptable levels also vary based on a debtor’s filing status; i.e. a single-earner, debtors who file as a two-person household, debtors who file as a three-person household, etc.

If a debtor falls below the median income level based on their state and household size, the means test does not apply and they can probably qualify for Chapter 7 bankruptcy.

Conversely, an individual who earns more than their state’s median income level is not automatically barred from filing a Chapter 7 bankruptcy. Calculations that involve allocating monthly expenses and exemptions will determine whether individuals will be allowed to file. It is important for you to consult with an experienced bankruptcy attorney to determine your eligibility.

The means test is essentially a formula for keeping potential bankruptcy filers with higher incomes from filing for Chapter 7 bankruptcy. These filers may use Chapter 13 bankruptcy to repay a portion of their debts, but not Chapter 7 to discharge their debts entirely. Although some potential filers feel that the bankruptcy means test is complex, most debtors seem to have no trouble meeting its requirements; others believe that the means test is not fair or equitable and indicate that the reference to consumer protection in the bankruptcy act is ironic at best, since those with primarily consumer debt are required to pass a means test while businesses are not.

Bankruptcy can be a complicated process. You need a knowledgeable and compassionate bankruptcy lawyer with extensive experience and a national reputation for excellence in the representation of debtors in financial distress. Call Client First Bankruptcy toll-free at 800-383-6004. Call us now for a more secure financial future.