Bankruptcy Means Test
Part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 is the introduction of a “means test” as a way to determine eligibility for filing chapter 7 bankruptcy. This new test looks at the debtor’s average income for the 6 months before filing and compares the income with the median income for the state the debtor is filing in. Many filers will fall below the median income for their state and will have no problem filing for chapter 7 bankruptcy. If the debtor has income that exceeds the median, they may still be able to file chapter 7, but must meet other requirements.
Those who have income above the median will have to calculate their excess income, which is considered money that is available for debt repayment. The debtor’s monthly expenses are determined and multiplied by 60 to figure out the debtor’s expected expenses over a 5 year period. If over that 5 year period, expected income exceeds the debtor’s expenses by more than $10,000, the debtor cannot file for chapter 7 and will be forced to file chapter 13. If the excess income is below an average of $100/month they are eligible.
The final factor in determining eligibility for those who have an excess of over $100, but less than $166 is based on what percentage the excess is in relation to the total debt. If the excess amount over 60 months is less than 25% of the total debt, chapter 7 is still possible.
Note that the methods to determine monthly expenses are not based on true living expenses. They are based on calculations from the IRS that are not very friendly and some of your expenses may be disallowed. If rent or house payments in your area are higher than what is allowable by the IRS, you may not be able to count the entire cost toward monthly expense calculations.
If you are filing with your spouse, make sure to calculate both of your incomes toward comparing with the median and excess income tests.
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