The "Means Test" and The New Bankruptcy Law?
Effective October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, aka the “new bankruptcy law” became effective. The law imposes certain restrictions, when it comes to filing for bankruptcy. One of the new requirements mandates that bankruptcy filers pass a “means test”.
The “means test” is a calculation that determines whether a bankruptcy filer has enough disposable income to file under chapter 7 or chapter 13. Chapter 7 allows bankruptcy filers to walk away from their debts after giving up most of their secured assets. If you are fail the “means test,” chapter 13 may be an option. Chapter 13 requires filers to pay back their secured debt and as much of their unsecured debt as possible.
The “means test” will be triggered, if a filer’s monthly income is greater than their state of residence’s median household income after adjustments inflation and size of family. To determine if a bankruptcy filer passes the “means test” a filer’s attorney must do the following:
Take your monthly income and subtract certain allowed expenses in the amounts determined by the IRS. These expenses don’t include things such as food, gas, clothing
Note: Under the new law, your monthly income is calculated as your average income over the past 6 months. So, if you lost your job 3 months ago and currently have no income, your monthly income would be determined not as what you truly earn at the moment but your average over the past 6 months.
Subtract payments on secured debts such as mortgage, rent payments and car loans
Subtract payments on priority debts such as child support, alimony, tax debts, wages to employees and $1500 in school tuition
If, what is left over is less than $100, then you pass the “means test”. If what’s left over is more than $166.66 then you fail the “means test” and are not eligible for chapter 7.
If, what is left is between $100 and $166.66 then the attorney has to determine, if you can repay 25% of your unsecured debts (credit card bills, medical bills, student loans, etc) over 5 years. If you can repay the debts, then you fail the “means test”. If you cannot repay the debts, then chapter 7 is still an option for you.
Get the summary of changes per the new bankruptcy law.