Bankruptcy: The Means Test

This is a follow up to my post on the new bankruptcy income eligibility requirement. If you have not read that post I would advise that you read it as it explains when and why Congress included a "Means Test" prior to filing bankruptcy under Chapter 7.

Most of my clients have an income greater than the median income allowed by the bankruptcy rules. This does not automatically exempt them from being able to file bankruptcy under Chapter 7 (debt discharge without any repayment) . Instead, it requires that my clients satisfy a "Means Test" to be eligible for filing under Chapter 7.

The "Means Test"
The Means Test is designed to determine whether you have enough disposable income to make payments to your creditors under a Chapter 13 (creditor repayment) plan. Congress included this test to address the situation where a debtor with no real valuable asset but substantial income files bankruptcy and gets discharged from his debts. One situation I have heard about involved a young man in his early 20's who lived in a modest apartment he rented, drove an older model car and made almost $50,000 per year on an online business selling medical uniforms. He used a credit card to pay off his student loan debts and his income to pay for trips to Europe, Asia, Hawaii, etc. Because he had an online business he was able to work from almost anywhere in the world. He filed bankruptcy prior to the new laws going into effect and was discharged of nearly $60,000 worth of credit card and other installment loan debt. Congress has attempted to "fix" this situation with the Means Test.

To determine whether you qualify for a Chapter 7 discharge under the Means Test, you subtract from your currenty monthly income: (1) certain allowable expenses (determined by the IRS); and (2) the monthly payments you will have to make on secured and priority debts. These debts include items such as a mortgage or car loan, child support, alimony, tax debts, and wages owed to employees.

If your total monthly disposable income after subtracting these amounts is less than $100, you are eligible to file Chapter 7 bankruptcy to receive a discharge of your debts. If your total remaining monthly disposable income is more than $166.66, you are ineligible to file Chapter 7 bankruptcy.

If your total monthly dispsable income is between $100.00 and $166.66, you must determine whether the remaining disposable income is enough to pay more than 25% of your unsecured, nonpriority debts (i.e. credit card bills, student loans, medical bills, etc.) over a five-year period. If so, you are ineligible for filing bankruptcy under Chapter 7.
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