Bankruptcy Means Test -- Bankruptcy Filing -- Chapter 13

Bankruptcy Means Test

The bankruptcy means test is used to determine if debtors are eligible to file for bankruptcy under Chapter 7, or to assess their ability to fund a Chapter 13 bankruptcy plan. Debtors whose income is more than the median income of their state, and whose debts are mainly consumer debts, must submit to a means test.

If a debtor’s household income in the preceding 6 months exceeds the median income for the state, then he or she will have to fill out another form to determine eligibility for a Chapter 13 bankruptcy filing, otherwise it could result in a finding of abuse, and dismissal of the Chapter 7 filing.

Chapter 7 is the most common type of bankruptcy petition, and it involves the liquidation of the assets of the debtor, by a trustee appointed by the bankruptcy court. The proceeds are used to pay the creditors, and the debtor gets a discharge from his or her unsecured debts, within a few months.

However, Chapter 7 debtors have to be prepared to lose assets, which may include their homes.

Debtors who file a Chapter 13 bankruptcy case, have to propose a plan to repay their debtors from their regular income over a period of 3 to 5 years, with 5 years being the standard period under the bankruptcy law 2005. 

Home owners usually prefer to opt for a Chapter 13 bankruptcy, because it permits them to keep their homes, as long as they keep making payments as per the plan approved by the bankruptcy court. 

After the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA), it is mandatory for debtors to pass a “means test” and to go through a credit counseling process from an approved credit counseling agency, before they can file a Chapter 7 bankruptcy petition. 

The chapter 7 bankruptcy means test involves the evaluation of the income and essential expenditure of a debtor. The day-to-day expenditure that is necessary for the debtor to live, as per the IRS schedules, is deducted from the monthly income, and if the final figure is less than the median income for the state, the debtor is eligible for filing chapter 7 bankruptcy.

The problem here is that the living expenses that are used for this calculation are from the IRS schedules, and not the debtor’s actual living expenses. 

On the other hand, if the income is more than the median income for the state, the bankruptcy court will ask the debtor to file for bankruptcy under Chapter 13 of the bankruptcy code. 

This means that under the new bankruptcy law 2005 debtors may be forced to file under Chapter 13, even if they don’t own a home that they want to protect. 

Approved credit counseling agencies help debtors to manage their finances, and to pay off their debts. A personal debt counseling course has also been made mandatory for debtors, before they can be granted a discharge by the bankruptcy court. 

It is best to seek the advice of a qualified bankruptcy attorney about how to file bankruptcy. On the other hand, most people are very capable to file themselves after spending time here at this web site.