How to Calculate a Bankruptcy Means Test
If your consumer debt is overwhelming, and you have considered all the alternatives, Chapter 7 bankruptcy can provide a "fresh start." According to the U.S. Courts website, a Chapter 7 bankruptcy frees you from most debts and protects you from collection actions. In 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act introduced a bankruptcy means test to the U.S. Code. The bankruptcy means test takes income and expenses into account, and determines your eligibility for discharge under Chapter 7.
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Instructions
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Bankruptcy Means Test
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Decide whether you need to take the means test. If you want to file under Chapter 13 (a court-structured debt repayment plan), you do not need a means test. Chapter 7 filers, however, must qualify under either part of the two-part test.
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Find an online calculator. Self-help legal publisher Nolo offers a calculator that will work in any state, created by Albin Renauer, J.D.
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Figure your current monthly income. If your current monthly income (CMI) is below the median income for your state, you qualify for Chapter 7. You do not have to complete the second part of the means test.
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Continue to the second part of the test if your CMI is higher than your state's median, because you might still qualify. The second part of the test looks at your monthly disposable income (income minus expenses).
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Calculate your disposable income. In this part of the means test, you deduct allowable expenses from your income to see how much you have available for unsecured debts.
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Deduct expenses. Certain expenses may be deducted in full, including mortgage and car loan payments. In addition, you will be able to take standard deductions based on household size, number of vehicles and your county's cost of living.
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Total your disposable income. If your disposable income is less than $110 per month (as of 2009), you may file Chapter 7.
If your disposable income would allow you to pay your creditors $6,575 over five years (about $110 per month), and this total would come to at least 25 percent of what you owe, you may not file Chapter 7.
If your disposable income allows payments of $10,950 over five years ($182.50 per month), you are not eligible for Chapter 7. If you are not eligible for Chapter 7, you can still file under Chapter 13.
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Tips & Warnings
Requirements other than the means test apply to Chapter 7 filings. One is that an individual must have received credit counseling from an approved agency. Also, in 2009, courts were required to charge a $245 case filing fee, a $39 miscellaneous administrative fee and a $15 trustee surcharge.
Although Chapter 7 bankruptcy offers a "fresh start," it should be a last resort. A Chapter 7 bankruptcy will stay on your credit record for 10 years. Before filing bankruptcy, try to reach out-of-court agreements with your creditors, who may be happy to work with you when they realize their alternative is receiving no money at all. Consider a Chapter 13 bankruptcy, in which you pay part of your debts. Chapter 13 only remains on your credit for seven years. Also, seek debt counseling from an agency affiliated with the National Foundation for Credit Counseling or the Association of Independent Consumer Credit Counseling Agencies. Beware of expensive debt consolidation programs; some are scams that can leave you worse off than you were before.
