The Bankruptcy Means Test: Why This Test is Important?
We recently come across a client who was advised by another attorney that the only choice she had is to file chapter 13 as her income exceeds the limit and she did not pass the Means Test. When we looked into her pay stubs and entered all the documents and here exemptions, she clearly passed the Mean Test. We were surprised at this advice. Apparently, she was handled by a paralegal of some “bankruptcy mill”, and the paralegal did not bother to put her all income figures into the system and calculated the test under the guidelines of BDCPA Means Test Income. Of course, this is a big blunder as she was told to continuously pay $2000 every month for the next 60 months.
The 2005 BDCPA changes into bankruptcy had one important change in the form of a Mean Income Test. The bankruptcy “means test” determines whether your income is low enough for you to file Chapter 7 bankruptcy. This is an increasingly complex formula designed to keep filers with higher incomes from filing for Chapter 7 bankruptcy. Well, if someone fails this test, it is not the end of the line but high income filers who fail the means test may use Chapter 13 bankruptcy to repay a portion of their debts. However, they are not eligible to wipe out their debts chapter 7 liquidation programs.
Chapter 7 has certain State income guidelines which increases with the size of the family. Chapter 7 qualification does not mean that one has to be completely broke in order to qualify. You can earn significant monthly income and still qualify for Chapter 7 bankruptcy if you have a lot of expenses, such as a high mortgage payment or you other regular monthly payments like student loan and car payments etc. Everything, no matter how little is, can contribute your qualification for Chapter 7 Means Income Test.
How Does the Chapter 7 Means Test Work?
The means test was designed to limit the use of Chapter 7 bankruptcy to those who truly can’t pay their debts. It does this by deducting specific monthly expenses from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.” The higher your disposable income, the more likely you won’t be allowed to use Chapter 7 bankruptcy. Again, if you have more surplus disposable income, you may be referred to Chapter 13.
This test is applicable only for consumer debts and not for business debts.
Is Your Income More Than the Median?
The first step is simple: If your current monthly income is less than the median income for a household of your size in your state, you pass. Stop and you don’t need to any more tests. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.
Do You Have Enough Disposable Income to Repay Some Debts?
For those whose household income exceeds the state median, the means test computations get significantly more complex. You must determine whether you have enough income left over (called “disposable income”), after paying your “allowed” monthly expenses, to pay off at least a portion of your unsecured debts (such as credit card bills). If your disposable income adds up to more than a certain amount, you fail the means test and cannot file for Chapter 7 bankruptcy.
Median income levels vary by state and household size, and each county and metropolitan region has different allowed amounts for categories of expenses: basic necessities, housing, and transportation. But don’t worry: You can get through the math with the help of an online calculator.
Use a Chapter 7 Means Test Online Calculator
Because it is a complex formula, we suggest that you come to our office for a free consultation, and we calculate this means test qualification for you.
If You Pass the Chapter 7 Means Test
Again, your qualification under this Means Test should not determine alone if you like to go forward and file bankruptcy. This decision should carefully be done after discussion with a qualified Nevada licensed attorney.
If You Don’t Pass the Chapter 7 Means Test
If you do not pass the means test, no need to panic. First of all, you can start thinking filing under Chapter 13. Also, you should take the following steps.
1. Wait some more time, if your income is continuously decreasing. Than calculate again of your six-month income. Maybe you qualify this time.
2. if you are getting any overtime, there is no compulsion to continue getting overtime on the sake of your family and health matters. Maybe this decrease in overtime can help you qualify for means test.