Bankruptcy law changed dramatically in 2005 with the passage of the federal Bankruptcy Abuse Prevention and Consumer Protection Act. The BAPCPA requires that debtors fill out a series of forms when they file. The forms determine whether a high-earning debtor is abusing the system by declaring Chapter 7 to eliminate his debts, even though he has the financial wherewithal to pay at least some portion of them.
The Statement of Current Monthly Income
With a few exceptions, the BAPCPA requires that all debtors who want to file Chapter 7 complete Form B22A, the Statement of Current Monthly Income and Means Test Calculation, and include it with their petition. The first part of the form -- B22A-1 -- is the Statement of Current Monthly Income. It determines whether the debtor’s income is above or below the median for his state and a family of his size. If his income falls below the median, there’s no presumption of abuse; in fact, it’s presumed he doesn’t have sufficient earnings to pay his creditors much of anything. He can check the box at the top that reads, "There is no presumption of abuse" and file for Chapter 7. He doesn’t have to fill out the other parts of the form.
The Means Test
If your income is above your state’s median, you must check the box that reads, "The calculation to determine whether a presumption of abuse applies will be made under Chapter 7 Means Test Calculation (Official Form B22A-2)." Form B22A-2 subtracts your regular monthly expenses from your average monthly income over the last six months. You can use the actual numbers for some expenses, but for others, you must use a standard set by the Internal Revenue Service -- what the IRS says a family of your size would reasonably be expected to pay for certain things like monthly groceries where you live. A presumption of abuse exists if your resulting monthly income is:
- More than $12,475, projected over five years, or
- At least $7,025 and equal to or exceeding 25 percent of your nonpriority unsecured debt, such as credit cards
Not all debtors are subject to the means test or a presumption of bankruptcy abuse. If you recently served in the military, talk to an attorney, because you may be exempt. You also may be exempt if most of your debts are related to a business you started. If you’re exempt, you can complete a third portion of the form, B22A-1 Supp, skip most of B22A-1 and avoid filling out B22A-2 entirely.
The Penalty for Abuse
If you fail the means test and the court finds there’s a presumption of abuse, it won’t result in criminal penalties. You have three options:
- You can convert your case to Chapter 13 because the means test has established that you have sufficient income to qualify and pay back a portion of your debts.
- You can walk away from the possibility of filing for bankruptcy. If you do nothing, the court will simply dismiss your case.
- You can attempt to rebut the presumption of abuse by proving to the court that extenuating circumstances will not allow you to pay back a portion of your debts, even though your income appears to be high enough to do so. This might be the case if you suffer from a medical condition and your care costs more than the means test accounts for or if your income over the last six months was a fluke -- a one-time event that you’re unlikely to ever repeat.
If Form B22A-1 indicates your income is above the median, consider talking to an attorney or legal aid. Form B22A-2 is extremely complicated and requires some understanding of the intricate terms of the BAPCPA. If you attempt to complete it yourself, you may fail the means test and the court will presume abuse.