Explanation of Bankruptcy Means Test
The bankruptcy "means test" came about with the changes under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. The test ascertains if your income is low enough to allow you to file for bankruptcy protection under Chapter 7. The tests prevent some filers with sizable incomes from filing Chapter 7 and rather forces them instead enter into debt repayment plans under Chapter 13.
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Features
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The basic test subtracts certain monthly expenses from the debtor's current monthly income. The "current monthly income" consists of the "average income" over the last six calendar months before filing the bankruptcy petition. The result represents the household's "monthly disposable income." People with a higher disposable income will likely find it difficult to file for Chapter 7.
Function
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The test applies only to consumer debts. The filer must have an income that falls below the median income level. If you pass the test you can proceed with filing for Chapter 7 bankruptcy. If your income exceeds the median income, you must then compute whether you have enough "excess income," after you account for specific expenses, to enter into a plan to repay some of your obligations to your creditors.
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Size
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If the amount of your income surpasses the median income of the state's median income, you may have the resources, according to the rules, to pay off some of the unsecured debt, such as credit cards or retail installment cards. You must take into account the household size and the various amounts that the formula allows for housing, transportation and common household necessities in your county and metropolitan region.
Considerations
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You can find online calculators for computing whether or not you meet the eligibility requirements of the means test to qualify for filing Chapter 7 (see Resources). Gather all the relevant information on your income and household expenses. The calculators take into consideration your ZIP code and the income and expense data required for your area. These figures will come in handy later because you can also use them on Form 22A, which you will have to file along with your bankruptcy petition and other financial documents.
Effects
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Eligibility for filing for Chapter 7 does not mean it makes the best choice for your circumstances. It makes sense for you to consider all the options that you have available before making a decision. Chapter 13 may offer the best solution, especially if you want to save your home from foreclosure, while you buy the time to cure the default.
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References
- Photo Credit Debt concept - cutting a credit card image by Sophia Winters from Fotolia.com
