Bankruptcy Means Test
Chapter 7 bankruptcy is the liquidation of your assets in return for having your debts foregiven. Chapter 13 bankruptcy lets you work with the court to find a way to pay off your debts over time. In 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act was enacted and created the means test in order to prevent people from using Chapter 7 to wipe out debt that they could pay through Chapter 13.
Means Test
Step I
Compare your monthly income to the state median:
If your income is at or below the state median, the presumption does not arise and you “pass” the means test. You can proceed with the Chpater 7 bankruptcy.
If your income is above the state median, go to Step II.
Step II
Calculate your disposable income over the upcoming five years:
If that number is below $6000, the presumption does not arise and you “pass” the means test;
If that number is above $10,000, the presumption does arise, and you can file under Chapter 7 only with a showing of special circumstances;
If that number is between $6000 and $10,000, go to Step III.
Step III
Multiply your outstanding unsecured, non-priority debts by .25:
If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts, the presumption arises and you can file under Chapter 7 only with a showing of special circumstances;
If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts, you “pass” the means test and can file under Chapter 7.
Reductions Allowed
The deductions are as follows:
- Living expenses listed under the National Standards and Local Standards
- Reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence.
- Administrative expenses of a Chapter 13 plan
- Reasonably necessary health insurance
- Disability insurance
- Health savings account expenses for the debtor and their family
- Reasonable and necessary expenses for care and support of an elderly, chronically ill, or disabled member of the debtor's family
- Actual expenses for each dependent child, not to exceed $1,500 per year per child, to attend school. This requires documentation and a detailed explanation for why such expenses are reasonable and necessary, and why they are not already accounted for in the National Standards
- An allowance for housing and utilities if it can be demonstrated that the costs are reasonable and necessary
- The amount due to secured creditors over five years plus the amount required to pay off housing and automobile creditors over five years, all divided by 60
- The amount due to pay off priority claims such as child support and alimony over the next five years, divided by 60
Special Circumstances
If the debtor can show special circumstances, such as a serious medical condition or a call to active duty in the Armed Forces, that add justifiable exepenses, the presumption of abuse (established by the means test) can be rebutted.so far as the circumstances justify additional expenses. In order to rebut the presumption you will have to submit documentation for the additional expenses and a detailed explanation as to why these additional expenses are reasonable.
You Passed the Means Test But....
Even if you’ve passed the means test, you should know that your bankruptcy trustee can still throw your case out for abuse if he deems that your particular case warrants it.