The bankruptcy means test can be used to determine if a debtor is eligible for Chapter 7 bankruptcy.
Filers could often meet the eligibility criteria under old bankruptcy law because bankruptcy judges had a lot of discretion when determining eligibility.
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Congress passed the Bankruptcy Protection Act of2005 to combat the inconsistent and lenient standards. To be eligible for Chapter 7 bankruptcy, filers must pass the bankruptcy means test.
Debtors are eligible to bypass the Means Test
Disabled veterans who took out debts while they were:
- On active duty
- Participating in homeland defense activities
- This exclusion is valid as long as:
- Veteran’s disability rating must be at least 30%
- Over half of the debt was incurred during active military service or in homeland defense.
If the majority of the debts a filer owes stem from the operation of a business, then the bankruptcy means test will not apply and the debtor can file for bankruptcy under Chapter 7.
Step 1: Compare Income to State Averages
The Means Test’s first section compares:
- Six months prior to filing bankruptcy, your average monthly income
- The median household income in your state
- Chapter 7 is available for debtors whose income is below or equal to the state median.
A bankruptcy trustee could still determine that you have sufficient income to repay creditors under a Chapter 13 repayment plan. The Means Test does not guarantee a definitive “yes.”
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If the trustee agrees, the bankruptcy court will convert Chapter 7 bankruptcy into Chapter 13. These sources should be included in the income calculation:
- Salary, tips, bonuses and overtime pay.
- Gross income from a profession, business, or farm
- Dividends, interest, and royalties
- Rent and real property rental income
- Spousal or child support is required on a regular basis
- Unemployment compensation
- Retirement income and pensions
- Workers’ compensation
- Annuity payments
- State disability insurance
- The calculation excludes income such as:
- Refunds of tax
- Social security retirement benefits
- Social Security Disability Insurance
- Supplemental Security Income
- Temporary assistance for families in need
Step 2: Compare Disposable Income
To determine eligibility, the second part must be completed if the debtor’s income exceeds the state’s median.
After deducting all permitted expenses, actual and standardized, the debtor’s income is sufficient to pay some of the unsecured debt under a Chapter 13 repayment program. Otherwise, Chapter 7 will not be available to them.
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- If you fail the means test, explain your special circumstances
- If a debtor fails to pass the bankruptcy means testing, they may still be eligible to file for Chapter 7.
Most likely, the motion will be filed to dismiss the case and/or convert it into a Chapter 13 bankruptcy. A debtor may defend the motion by proving that “special circumstances” exist, such as:
- Recent unemployment
- Rents are unusually high
- An extremely serious medical condition
You must show the unique circumstance by:
Documentation for the expense or adjustment you are requesting to your income
- Be clear about the need for the adjustment/expense
- If the bankruptcy court approves the expense or adjustment, and you pass the means testing, you can win the motion.
- If you fail the Means Test, file for Chapter 13 bankruptcy
If a debtor fails to pass the means test, they may file Chapter 13 bankruptcy. Chapter 13 allows a debtor to repay his or her debts over a five year period.
Plan must include repayment of all mandatory debts such as secured and priority debts. It also should cover non-priority and unsecured creditors.
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A bankruptcy attorney can help you explain special circumstances or answer questions regarding the Means Test.