Determining whether or not you qualify for bankruptcy can be an intimidating experience. Struggling with finances does not automatically make you a good candidate for bankruptcy, and likewise, doing “OK” financially could still mean you are on a one-way path to needing bankruptcy. There are several things you need to consider when determining if bankruptcy is right for you. One issue is whether or not you qualify for a chapter 7 bankruptcy under the Means Test.
This test was included in the Bankruptcy Code enacted by the US Congress in 2006. The code’s intent was to prevent abusive bankruptcy filings and also to discourage them from filing Chapter 7 if they are capable of handling a Chapter 13 bankruptcy plan. In addition to taking the bankruptcy means tests, those filing for Chapter 7 are also required to participate in a credit counseling course.
Chapter 7 Bankruptcy Means Test
The intentions of the Chapter 7 and Chapter 13 means tests are slightly different. The Chapter 7 means test calculates an individual or family’s average monthly income to determine if they are at or below the median income for families of a certain size. Those below the median income qualify to file Chapter 7. Registering above the median income does not automatically disqualify you from Chapter 7, but does mean you will need to do a few additional calculations in order to qualify.
There are some instances in which filers are excluded from needing to take the means test. Exclusions include disabled veterans, members of the armed forces, or those with primarily business debts.
If you are concerned the means test could prevent you from securing the financial assistance you need, there is no need to fret. Most people who want to file for Chapter 7 do qualify, but the test is in place to discourage Chapter 7 abuse. If you take the test and there is clearly an easy way for you to meet the obligations of a Chapter 13 payment plan, then that is the better option for you anyway. Most people have some idea of their payment plan ability before they ever consider filing.
If you fail the Means Test for Chapter 7, it does not mean you cannot file a Chapter 7. The result is that IF you choose to still file, your case will be marked with a “Presumption of Abuse”. This is obviously not the best way to step into bankruptcy court.
In some rare cases, a person who would’ve qualified for a Chapter 7 before the 2006 changes, might now not qualify under the Means Test. For the most part, if you fail the Means Test, it could be a clear indication that you should explore the possibility of filing a Chapter 13 bankruptcy.
It is possible that the Chapter 13 payment would be small and well within a person’s budget and pave the way to a better financial future.
Chapter 13 Bankruptcy Means Test
The means test for Chapter 13 bankruptcies is a little different and designed to determine how much disposable income a debtor has. This makes it easier to determine a reasonable payment plan that provides some financial security and makes it possible to retain ownership of a home.
It is also important to remember that the Means Test is NOT a perfect test. In fact, there has been much discussion amongst bankruptcy attorneys that the Means Test did little to prevent any bankruptcy abuse and instead often just complicates a legitimate filing. That is a discussion for another time.
The important thing to remember is that the Chapter 13 Means test might often produce a disposable income amount that is unrealistic. In this case, a trustee will look at your bankruptcy schedules “I” and “J” (Income and Expenses) to determine what your payment should be.
The surplus amount in your Income & Expenses is what your attorney will use for your payment plan because that is you ACTUAL budget. One fault of the Means Test is that it does not consistently use your actual expenses. Instead it uses average costs based on your locality instead of your actual expenditure.
Another issue is that it uses an average of your last 6 months of income. Seasonal employment or irregular pay or commissions will create an artificial monthly income.
These factors will immediately throw off the disposable income presumption. This is why your Chapter 13 payment plan is really tied to your actual income and expenses listed on Schedules “I”: and “J”.
If you think you might qualify for exclusion or you are unsure how to proceed with taking a means test, we can help. Contact the law office of Frank J. LaPerch, PC at 845.942.5500.