The Bankruptcy Abuse Reform Act brought
up a different obstacle when filing a Chapter 7 bankruptcy
and that is the means test. I will try to cover every
detail in the most simple way in understanding the means
test and what it means to you, because that is really why
you are here reading this site in the first place. The test
is basically whether or not you really have the money to
pay off your creditors. If you fail the meanst test, you
cannot file a chapter 7 and your only option will be to
file a chapter 13 where you will have to repay a portion of
your debts over a five year period. The first part of the
test actually will tell you if you need to even take the
means test. If your income for the six months prior to
filing your bankruptcy is less than the median of your home
state than you don’t need to do anything else but file your
bankruptcy. The median income from each state is obtained
from the census bureau. The median income for each
household will vary according to the household size,
meaning how many people are in your family. Below is a link
to the census bureau with a table of the median income for
each state.
Median Income for Your
State
The idea behind the means test is that people who make more
than the median should not be able to walk away home free
in a chapter 7 bankruptcy. If you do make a bit more than
the median income listed in the table above from the census
bureau all is not lost, we then move on to the means test.
We basically need to compute your income for the six months
months prior to you filing your bankruptcy and multiply
that by twelve to see if you can pass the means test after
your expenses. Your Income will include the following:
Salaries, bonuses and commissions
Retirement income
Tax refunds
Income from the sale of a business
Rental income (the net)
Support payments you receive
Insurance payments
Gifts and inheritances
Income will not include:
Social security
Payments to victims of war crimes or terrorism (example,
9/11 World Trade Center families)
When calculating your income to see if it exceeds the
median amount, your spouse’s income will be counted to the
extent he or she is contributing to household expenses. The
income of your spouse will not count if you are married but
legally seperated, or you’re living separate and apart as
long as you didn’t do it fraudulently to avoid passing the
means test. After you do all of this you can figure out
your income and compare it to the median income in the
table above with the link provided. Then you can go ahead
and start deducting your expenses which are calculated
according to the IRS standards. For example:
Housing expenses:
Rent
Property taxes
Mortgage Interest
Parking
Necessary maintenance and repair
Association dues for condos
Gas
Electricity
Water
Telephone
Other necessary expenses include:
Taxes
Payroll deductions
Insurance
Childcare expenses
Healthcare
After you figure out how much excess income you have after
all your bills are paid, you then have to calculate whether
or not you can pay your unsecured debts (credit card etc.)
If you can pay a good portion of your debt after expenses
you will fail the means test, unless you can show special
cirumstances why you really can’t a portion of your debt.
Even if you fail the means test you can still qualify to
file a chapter 7 if you can show special circumstances,
such as a medical condition that justifies extra expenses
or adjustments to your monthly income where you have no
other options. Special circumstances can also mean you lost
your job and you really need to file bankruptcy right away.
Just because you made lots of money last year doesn’t mean
you have the same opportunities today.
