What Does the “Means Test” Mean to You and Your Bankruptcy?

In 2005, the U.S. Congress passed the most sweeping change to Bankruptcy Law since the 1970’s. These changes were largely the result of lobbying efforts of credit card companies that indicated there was a significant problem with abusing the Bankruptcy system by filing for Chapter 7 liquidation when Debtors could afford to pay at least a portion of their unsecured debts. This assertion by the lobby was without any significant evidence that such abuse was occurring on a wide scale. Despite the lack of evidence, on October 15, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law.

One of the major revisions to the law was the implementation of a “Means Test” to create certain thresholds that a Consumer (the test does not apply to businesses) must demonstrate as part of their petition to file Chapter 7. The two-step test allows for Chapter 7 to be filed if the Debtor is able to “pass” one or the other step.

Step 1 –  If your monthly before-tax household income is less than the Texas median income for a household of your size, you are presumed to be eligible to file for Chapter 7 bankruptcy under Section 707(b)(2). The median income is adjusted periodically and the most recent information is below:

# of People in household               Median Annual Income (using avg income of last 6 mos)

1                                                                      $49,996

2                                                                      $65,708

3                                                                      $72,632

4                                                                      $84,724

5                                                                      $93,724

6                                                                      $102,724

If your income falls below these figures for your household size, you PASS the test and may file Chapter 7. However, if you failed step 1, you may still be able to file a Chapter 7 case, but a more in-depth evaluation of your ability to repay some of your unsecured debts (Credit Cards), is required.

Step 2 – Remember, the purpose of the means test was to determine if you could pay all or part of your Credit Card debt, and if you do have the “means” to do that, then filing a Chapter 7 case is presumed abusive under the BAPCPA.  As such, step 2 will calculate your monthly expenses and subtract them from your monthly income in Step 1. The inclusion of expenses is very regimented and part of a form that is filed with your case.  Each expense should be substantiated with evidence supporting it.  Your monthly expenses are subtracted from your income to provide your “disposable income”.  If your disposable income over 60 months (the length of a Chapter 13 plan) is sufficient to pay at least 25% of your credit card debt, then you must file a Chapter 13 case. An oversimplified example is below:

Credit Card Debt – $50,000

Income/Month     –    Expenses/Month    =    Disposable Income

$4,000                  –             $3900              =         $100

Disposable Income        x            Length of Ch 13 Plan         =    Amt able to pay credit cards

$100                                 x                            60                         =            $6,000

If you had filed a Chapter 13 case and committed the $6,000  to pay your credit card debt, you would have only the ability to pay back 12% of the $50,000.  Since your disposable income is not sufficient to pay at least 25% of the $50,000 in credit card debt, you would PASS step 2 and be permitted to file a Chapter 7 case.

Bankruptcy is a complex process and while you are permitted to represent yourself in a Bankruptcy case, the pitfalls are many and the help of an experienced Bankruptcy Attorney could help save far more than the fee for their representation.  LoBue Law, PLLC can assist with the process of filing Bankruptcy and offers free consultation by appointment only.  Contact us today – (972) 694-6400. The above example is an oversimplification of the calculations in the means test and is only meant for demonstration purposes. This blog post is not intended to be legal advice.