Our Bankruptcy Attorney Blog

The means test that now applies to bankruptcy filings in the United States is a completely new concept. Prior to 2005, anyone could file for bankruptcy and the judge had the discretion to determine whether or not a filing was legitimate or not and how the case should proceed. This all changed with the passing of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), which was essentially written by the institutional lending industry and passed on behest of their well financed lobby in Washington. The result is that now some people can be denied chapter 7 bankruptcy protection based on their income over the preceding six months, which in turn somewhat defeats the purpose of filing.

Prior to the passing of BAPCPA, Chapter 7 bankruptcy served as an excellent safety net for debtors that suddenly faced a major financial disaster. That is, indebted people that suddenly lost a job, had a medical emergency, or some other financial hardship could file for bankruptcy protection before they were utterly destitute as something as a preventive measure. This, in fact, is a large part of the entire purpose of bankruptcy, to help people facing default avoid utter destitution. However, the means test somewhat changes this dynamic because it looks at the filers income over the last six months, which means that the debtor would have to be in significant financial difficulty for at least half a year prior to filing.

The means test involves looking at the filer’s average income for the preceding six months and then comparing this to the median income of the state in which the debtor lives. This is done by averaging the previous six month’s income and then doubling it to produce an estimated annual income. This estimated annual income is then compared against the state’s median income for a person meeting the debtor’s specifics (single, married, etc.). if the debtor’s prior income is above the state’s median, then Chapter 7 bankruptcy is denied out of hand, though Chapter 13 bankruptcy may still be available. If the debtor’s income was below the state’s median, than Chapter 7 remains an option until the next phase of calculations.

The next part of the means test takes the filer’s income and subtracts basic living expenses (this does not include paying their debts, but includes a clearly defined list of regular living expenses like housing costs, utilities, and so on). The resulting number is supposed to represent the debtor’s discretionary income and it is then multiplied by 60 – representing sixty months/five years – to see if the debtor’s alleged discretionary income is enough to enable him to pay off his debts through a five year Chapter 13 debt restructuring scheme. If this “discretionary” income exceeds $10,000, then the court will deny Chapter 7 protection, allowing only a Chapter 13 bankruptcy. This has been the most controversial aspect of the means test because the living expenses are too narrowly defined resulting in gross misrepresentations of what is actually “discretionary” in many cases.

If the debtor’s previous income exceeds the state median, but his “discretionary” income does not equal $10,000, then a third calculation comes into play. If the debtor’s discretionary income is less than $100 per month, then Chapter 7 is readmitted as an option. If the debtor’s monthly income is between $100 and $166.67 (the $10,000 mentioned above over five years), then more calculations come into play.

The means test is extremely complicated and was designed to be that way by the authors of the BAPCPA in order to discourage people from filing for bankruptcy.

Tags: bankruptcy lawyer

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