A Primer on the Bankruptcy Means Test, and a Reminder

Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), all people who filed bankruptcy with primarily consumer debts (mortgage, car, credit cards, medical bills, etc.) are now required to fill out what is called the "Means Test." The means test is another method the bankruptcy system can use to determine if a person can qualify for a Chapter 7 Discharge, as well as determine how much money, if any, a debtor must pay to their unsecured creditors in a Chapter 13 bankruptcy.*

*Under previous and current law, a straight calculation of income minus reasonable and necessary expenses is used for this purpose. It's almost as if congress didn't trust reality.

As a first measure, the Means Test uses the average total household income for the prior 6 complete months (if a case is filed in November, the months used are May-October), and compares that to the median income for the same-sized family in their state of residence (these numbers are compiled by the Census Bureau). If the income is below the median, the Means Test is over, and no "presumption of abuse" is created.*

*The bankruptcy code uses "abuse" as its legal term for whether to allow a Chapter 7 Bankruptcy or not.

If the income is ABOVE the median income, more work remains to be done. The actual Means Test is then applied, which consists of deductions taken against the average income already calculated. Some expenses are directly drawn from the IRS, and some are reflective of the debtor's actual expenses. At the end of all this, a net income is generated (it can be negative or positive). If the "Disposable Monthly Income" (DMI) is above a certain threshold, the debtor is assigned a "presumption of abuse" for purposes of filing a Chapter 7 bankruptcy. In a Chapter 13, the DMI is multiplied by 60 to determine an amount needed to pay unsecured creditors in the case.

Once the presumption of abuse arises, there are two main options: 1) rebut the presumption and continue with the chapter 7, and 2) decide against the chapter 7 filing. Some attorneys do not, as part of their practice, handle cases in which the presumption of abuse arises (some don't even handle over-median chapter 7 cases). I am not among those, but unless there are specific facts and circumstances that would change how the court looks at the case, rebutting the presumption is difficult, and will likely cost you more for the trouble. If a chapter 7 doesn't work for you because of income concerns, a chapter 13 is usually a workable option.

This calculation is of particular concern right now because there are new median income figures effective November 1, 2009, and in many places the median income has dropped. You may have a 21 day window in which to qualify for the previous median income figures, so if you are considering a bankruptcy, contact an attorney now to see if this can make a difference for you.