Chapter 7 Bankruptcy Means Test
Understanding the Qualifications for Chapter 7 Bankruptcy
Bankruptcy Attorney Consultation
Since the passage of the 2005 bankruptcy law, Americans struggling with debt must qualify under the "means test" to be able to file under Chapter 7 of the U.S. Bankruptcy Code.
The bankruptcy means test is designed to make sure that the powerful protection of Chapter 7 bankruptcy is reserved for those who truly need it, particularly those with little monthly income. Most individuals who are considering personal bankruptcy are still eligible to file under the means test.
A local bankruptcy attorney can explain the Chapter 7 means test and how Chapter 7 bankruptcy may provide you with a fresh financial start.
To connect with a nearby bankruptcy attorney for a free consultation to learn about your options, simply fill out our free case evaluation form or call 877-833-2410 today.
The Purpose of the Means Test
In a CNNMoney.com article, Jack Williams, resident scholar of the American Banking Institute, is quoted as saying that BAPCPA was designed to make filing for bankruptcy "more complex, more expensive and more difficult". And, while it succeeded in these goals, it failed to achieve its other aim of lowering the overall total of bankruptcy filings.
Though many experts may agree with Mr. Williams, the means test's stated purpose was not to complicate the lives of bankruptcy filers. Rather, its goal was to make sure the protection offered by Chapter 7 bankruptcy was limited to only those petitioners who didn't have enough income to make payments under a Chapter 13 repayment plan.
Chapter 7 bankruptcy offers petitioners:
- A complete discharge of many unsecured debts (that is, debts not attached to property, such as credit card and medical bills)
- An opportunity to reaffirm, redeem or surrender secured property to lenders
- A relatively speedy bankruptcy process, with only a few months between filing and receiving a discharge
Chapter 13 bankruptcy, on the other hand, requires filers to make payments to creditors over a period of three to five years. The means test, then, acts as a sort of filter—those whose incomes allow them to make at least partial payments to creditors must do so.
How the Means Test Works
The test itself consists of two major steps. Because the process demands some in-depth mathematical calculations as well as knowledge of current financial statistics, working with a bankruptcy attorney is usually a good idea.
- Median income comparison: The first step in the means test is a comparison of the filer's household income to the median income for a family of the same size in that state. If the filer's family brings in less money than the applicable median income, that's a "pass"—the petitioner is generally eligible to file for Chapter 7 bankruptcy. If not, it's not over; there's a second step.
- Disposable income calculation: This step requires a determination of "disposable income", which is calculated by subtracting "allowable expenses" (as determined by the IRS) from monthly earnings. This number is then multiplied by 60 to determine disposable income for the next 5 years. If the total is less than $6,000, the petitioner is generally eligible for Chapter 7. If it's more than $10,000, he or she will probably have to file under Chapter 13. If it's between $6,000 and $10,000, there's another step to complete.
- Unsecured debt comparison: If the figure calculated in step two falls between $6,000 and $10,000, that total is compared to the amount of unsecured, non-priority debt. If the total disposable income over five years equals less than 25% of these debts, that generally means the petitioner is eligible to file under Chapter 7.
This process can be confusing. Allowing a personal bankruptcy lawyer to help you navigate the complexity of the Chapter 7 means test can help relieve the stress you may otherwise feel trying to get the calculations correct.
The Means Test's Effect on Bankruptcy Filings
Immediately before BAPCPA took effect, bankruptcy filings rose dramatically - apparently, many petitioners were worried that they would no longer qualify for bankruptcy protection with the new restrictions in place. As a result, filing totals fell off greatly just after the law's passage.
But, as 2005 recedes further and further into the past, filing totals are climbing upward again. Personal bankruptcy filngs in 2009 approached 1.5 million, and most experts predict filings will only continue to rise over the next few years - and likely surpass pre-BAPCPA levels.
Discuss the Chapter 7 Means Test with a Bankruptcy Lawyer
If you're ready to take the next step in your journey toward a fresh financial start, Clear Bankruptcy can connect you with a bankruptcy lawyer practicing in your area.
Simply fill out our free bankruptcy evaluation form or call us at 877-833-2410. We'll put you in touch with a local attorney so you can begin moving toward financial freedom.