The Bankruptcy Means Test
To figure out if your gross income is too high over the 6 months preceding
the month in which you file for Chapter 7 bankruptcy protection, the bankruptcy
means test was created. It uses a formula that is essentially designed
to prevent high wage earners from filing for Chapter 7 bankruptcy relief.
If you fail the bankruptcy means test and it is determined that your income
is too high (based on your household size, area of the country and state
you reside in), you will still be able to file for Chapter 13 bankruptcy
relief, but you will have to repay a portion of your general unsecured
debts; that is you will be barred from using a Chapter 7 bankruptcy to
entirely wipe out your general unsecured debts.
Is Your Income Greater Than the Median - How Does It Work?
The bankruptcy means test was created to require debtors who have high
household gross incomes to pay back a minimum of at least 25% of their
total, general unsecured debt over a five-year Chapter 13 Plan. This test
does not mean that you have to be penniless to qualify for a Chapter 7
bankruptcy discharge; the vast majority of debtors pass the means test
and only individuals who primarily have consumer debts rather than business
debts must take and pass the means test.
The first step in the bankruptcy means test is to compare your monthly
gross income to the median gross income for a household of your size in
the area of your state where you reside. If your household’s gross
income is less than the median for your family size and location, you
do not need to proceed any further and you can move forward with the filing
of a Chapter 7 bankruptcy case if you otherwise qualify. This first step
is an objective test, however gross median income levels can not only
vary from state to state, but even between counties and metropolitan regions,
making this a complicated task to perform on your own.
This brings us to the second step in the bankruptcy means test; if your
gross income exceeds the median you still have a very good chance of qualifying
for Chapter 7 relief (if you otherwise qualify) because there are a lot
of specific household debt and expense payments, such as mortgage payments,
car loan payments, taxes and many other specific payments that all can
all be used to reduce your gross income below the median level for your
State and area. In the vast majority of cases these allowable expenses,
more often than not, are used to qualify a debtor under the means test
when the debtor’s entire household gross, monthly, income is above
the median and at first blush disqualifies him/her from filing for Chapter 7 relief.
What Happens If I Pass the Means Test?
Passing the bankruptcy means test does not automatically mean you will
qualify for a Chapter 7 bankruptcy. The court will also have to look at
two other forms – Schedule I - which calculates Your projected net
monthly Income, after deducting all allowable payroll deductions from
your gross income; and Schedule J - your projected legitimate monthly
household Expenses. Deducting your legitimate/allowed monthly, household
expenses from your projected monthly net income is used to determine whether
you have any monthly disposable income under the Bankruptcy Code’s
historical good faith test. If you have more than $100 in monthly disposable
income you will not be eligible to file for Chapter 7 bankruptcy relief.
This means that you will be expected to pay/commit your monthly disposable
income to the Chapter 13 Trustee pursuant to a Chapter 13 plan for anywhere
from 3 – 5 years in order to repay your creditors up to 100% of
the amount of your general unsecured debt before you are entitled to receive
the Court’s Discharge Order.
Additionally, just because you qualify for a Chapter 7 bankruptcy, does
not necessarily mean it is the best course of action for you. You should
always consult with a bankruptcy attorney first to ensure that the decision
you make is the one that is best suited for you and your set of circumstances.
What If I Don’t Pass?
If you fail to pass the means test, you will be limited to filing for Chapter
13 relief, which requires monthly payments being made over a five year
period which will be high enough to ensure that your general unsecured
creditors receive at least 25% of the amount owed to them when your petition
was filed. The debtor’s budget is closely reviewed by The Chapter
13 Trustee and monitored by the Bankruptcy Court. While many individuals
prefer to file a Chapter 7 bankruptcy if they can because it does not
require repayment and allows for a quick discharge within several months
as opposed to years, Chapter 13 is still often the only option for handling
certain types of debt, such as for curing a default on a mortgage or for
the repayment of debts that cannot be discharged in a Ch 7 bankruptcy.
Whatever you do, make sure you seek the help of an attorney experienced
in all aspects of individual bankruptcies (Chapter 7 and 13) in order
to make the best possible decision concerning your financial future.
Hackensack Bankruptcy Attorney
Making the decision to file for bankruptcy can be difficult, but, even
if you don’t qualify for Chapter 7 protection, Chapter 13 protection
can still provide the fresh start that you need. If you are considering
filing for bankruptcy, reach out to The Law Offices of Marc G. Alster.
Mr. Alster has been representing clients for approximately 30 years, assisting
them in finding the best possible strategies for solving their financial
problems, and can do the same for you.
Contact Mr. Alster today at
(201) 878-4630 to schedule a free initial consultation.