How Does the Bankruptcy Means Test Impact Debtors?

The Bankruptcy Abuse Prevention & Consumer Protection Act of 2005 (BAPCPA) significantly changed the U.S. Bankruptcy Code. The Act was intended to prevent fraud and abuse of the bankruptcy process. However, many people have argued that BAPCPA has made it more difficult for hard-working individuals to file for bankruptcy relief.

For example, debtors are required to complete a credit counseling course before they file their bankruptcy petition. In addition, debtors must also complete a debtor education course before receiving a bankruptcy discharge. One of the more controversial changes was the requirement to complete a “test” to determine if a debtor can afford to pay back some or all his or her debt. The “test” also determines whether a debtor is eligible to receive a bankruptcy discharge under Chapter 7 or Chapter 13 of the Bankruptcy Code. The “test” is called a Means Test.

What is the Bankruptcy Means Test?

The means test examines a debtor’s monthly income and allowable expenses to calculate whether the debtor has disposable income sufficient to pay toward the person’s debt. If the debtor “fails” the test, the debtor is not eligible to file a Chapter 7 bankruptcy case. Even though lawmakers argued that the income test was a “simple” test intended to prevent abuse in Chapter 7 cases, in some cases, the income test can be complex and difficult to complete. Our bankruptcy lawyers have studied the means test and understand how to use every deduction and allowable expense to bring your disposable income as low as possible.

How Is the Means Test Calculated?

The means test has two sections. The first section of the test compares your gross monthly income to the median income for a household of the same size where you reside. Your annual median income is calculated by averaging your gross monthly income for the past six months and multiplying that figure by 12 to arrive at an annual median income. If the amount of your annual median income is lower than the state median income for a household of your size, you “pass” the test and you are eligible to file a Chapter 7 bankruptcy case.

However, if you “fail” the first section of the test, this does not mean you cannon file under Chapter 7. The second section of the means test calculates your disposable income. If your disposable income is below a certain amount, you may still file a Chapter 7 case in some cases. Disposable income is calculated by deducting allowable expenses, such as taxes, health insurance, food, clothing, and utilities. After deducting allowable expenses, if your disposable income exceeds the limits, you are not eligible for a discharge under Chapter 7, but you can file under Chapter 13.

Are There Exceptions to the Means Test?

Yes, there are a few exceptions; however, they are very limited. One of the exceptions to the means test that is often used is the exception for debtors whose debts are not primarily consumer debts.  This exception is intended for debtors whose debts were incurred in the course of business. If the debts are primarily business debts, the means test does not apply.

Assume that a debtor owns a small business.  The debtor had to co-sign all business debt because lenders would not loan money to the business without a personal guarantee. The business closes because of lack of sales, and the owner does not have the money to pay all debts in full. The creditors begin collection actions against the owner for the co-signed debts.

If the owner’s debts are primarily composed of the debts of the business, the owner can file a Chapter 7 bankruptcy case even if the owner’s median income exceeds the state median income for the same size household of the owner. This exception is very important for business owners who have co-signed business debt, but are forced to close the business because of lack of sales or income.

Get Help with Completing the Bankruptcy Means Test

If you are struggling with debts, our bankruptcy lawyers can help. Just because you qualify to file a Chapter 7 bankruptcy case does not mean that it is in your best interest to file under this chapter. We use our experience and knowledge to analyze your financial situation to determine all options for debt relief before advising you which option is in your best interest.