The New Bankruptcy Law "means Test" Explained In Plain English
With the new bankruptcy law in effect as of October 17, 2005,
there is a lot of confusion with regard to the new “means test”
requirement The means test will be used by the courts to
determine eligibility for Chapter 7 or Chapter 13 bankruptcy
The purpose of this article is to explain in plain language how
the means test works, so that consumers can get a better idea of
how they will be affected under the new rules
When most people think of bankruptcy, they think in terms of
Chapter 7, where the unsecured debts are normally discharged in
full Bankruptcy of any variety is a difficult ordeal at best,
but at least with Chapter 7, a debtor can wipe out the debts in
full and get a fresh start Chapter 13, however, is another
story, since the debtor must pay back a significant portion of
the debt over a 3-5 year period, with 5 years being the standard
under the new law
Prior to the advent of the “Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005,” the most common reason for
someone to file under Chapter 13 was to avoid the loss of equity
in their home or other property And while equity protection
will continue to be a big reason for people to choose Chapter 13
over Chapter 7, the new rules will force many people to file
under Chapter 13 even if they have NO equity That’s because the
means test will take into account the debtor’s income level
To apply the means test, the courts will look at the debtor’s
average income for the 6 months prior to filing and compare it
to the median income for that state For example, the median
annual income for a single wage-earner in California is $42,012
If the income is below the median, then Chapter 7 remains open
as an option If the income exceeds the median, the remaining
parts of the means test will be applied
This is where it gets a little bit trickier The next step in
the calculation takes income less living expenses (excluding
payments on the debts included in the bankruptcy), and
multiplies that figure times 60 This represents the amount of
income available over a 5-year period for repayment of the debt
obligations
If the income available for debt repayment over that 5-year
period is $10,000 or more, then Chapter 13 will be required In
other words, anyone earning above the state median, and with at
least $16667 per month of available income, will automatically
be denied Chapter 7 So for example, if the court determines
that you have $200 per month income above living expenses, $200
times 60 is $12,000 Since $12,000 is above $10,000, you’re
stuck with Chapter 13
What happens if you are above the median income but do NOT have
at least $16667 per month to pay toward your debts? Then the
final part of the means test is applied If the available income
is less than $100 per month, then Chapter 7 again becomes an
option If the available income is between $100 and $16666,
then it is measured against the debt as a percentage, with 25%
being the benchmark
In other words, let’s say your income is above the median, your
debt is $50,000, and you only have $125 of available monthly
income We take $125 times 60 months (5 years), which equals
$7,500 total Since $7,500 is less than 25% of your $50,000
debt, Chapter 7 is still a possible option for you If your debt
was only $25,000, then your $7,500 of available income would
exceed 25% of your debt and you would be required to file under
Chapter 13
To sum up, first figure out whether you are above or below the
median income for your state (median income figures are
available at
ptcy-law-infocom) Be sure to account for your spouse’s
income if you are a two-income family Next, deduct your average
monthly living expenses from your monthly income and multiply by
60 If the result is above $10,000, you’re stuck with Chapter
13 If the result is below $6,000, you may still be able to file
Chapter 7 If the result is between $6,000 and $10,000, compare
it to 25% of your debt Above 25%, you’re looking at Chapter 13
for sure
Now, in these examples, I have ignored a very important aspect
of the new bankruptcy law As stated above, the amount of
monthly income available toward debt repayment is determined by
subtracting living expenses from income However, the figures
used by the court for living expenses are NOT your actual
documented living expenses, but rather the schedules used by the
IRS in the collection of taxes A big problem here for most
consumers is that their household budgets will not reflect the
harsh reality of the IRS approved numbers So even if you think
you are “safe,” and will be able to file Chapter 7 because you
don’t have $100 per month to spare, the court may rule otherwise
and still force you into Chapter 13 Some of your actual
expenses may be disallowed What remains to be seen is how the
courts will handle cases where the cost of mortgages or home
rentals are inflated well above the government schedules Will
debtors be expected to move into cheaper housing to meet the
court’s required schedule for living expenses? No one has any
answers to these questions yet It will be up to the courts to
interpret the new law in practice as cases proceed through the
system
Tags | abuse, advent, bankruptcy, chapter, consumer, debtor, expenses, living, prevention, protection, requirement, result
Comments are closed.