The “Means” Test

What is The “Means” Test?

The Means Test: The biggest misconception about the 2005 bankruptcy law changes is that people who make more than the state median income no longer qualify for bankruptcy. This is not true. Above median, debtors are now required to complete the “Means Test” to see if the formula indicates that they might have discretionary income available to repay some or all of their debts in a Chapter 13 bankruptcy case. Many above-median debtors still qualify for Chapter 7 bankruptcy, and those who don´t may have other options, including Chapter 13 bankruptcy, that will protect them from their creditors. I specialize in getting people whose income is greater than the means test approved for Chapter 7.

New Burdens: THE MEANS TEST

The “new” bankruptcy law imposes heavy burdens on bankrupt debtors that were not required under the old law. One of the most burdensome of the 2005 changes in the income and expense test is called the “Means Test”, which attempts to try to standardize bankruptcy law. The Means Test was added because the creditors convinced Congress that many people were filing Chapter 7 bankruptcy even though they had the means to repay some or all of their debts, and they wanted a formula to help push those individuals into Chapter 13.

Many studies showed that the creditors´ studies were incorrect; there weren´t the numbers of people who were “getting away” with filing Chapter 7 when they should be in Chapter 13, but Congress bought the creditors´ concerns hook, line, and sinker. Basically, the creditors (the banking industry) refused to accept any blame for creating the credit problem by giving out easy, simple credit and then changing the terms of the contract (read–charge unreasonably high-interest rates) to where people could not afford to make their payments and instead got Congress to try to force the consumer to pay them more money instead of filing for bankruptcy.

Regardless, we are stuck with this bad test, and individuals who want to file for bankruptcy and whose household income is more than their state´s median income will have to apply the formula under the Means Test as part of the process to see if they can file Chapter 7. Just because household income is above the median, doesn´t mean you can´t file for Chapter 7 bankruptcy but having to take the means test does make the paperwork more cumbersome. I specialize in getting people whose income is greater than the means test approved for Chapter 7.

My personal experience with the Means Test has been that the Means Test has made bankruptcy more difficult on lower and middle-class clients and gives absurd results for many people. I have not seen high earner debtors forced into Chapter 13 who I wouldn´t have recommended file for Chapter 13 under the “old” law. Determining how to calculate the income to use in the Means Test as well as what expenses are allowed to be deducted is confusing for even the most experienced bankruptcy lawyers, and I believe it places an unnecessary burden on many innocent debtors. Since the results of the means test can be a bazaar, I find this requirement to be ridiculous. My belief is that anyone who could/would abuse the system under the old law, can do so under the new law, but honest and hardworking debtors are being forced to bear a much higher and unnecessary burden to claim much-needed relief under the bankruptcy laws.

Under the “old” law

The Bankruptcy Court reviewed debtors’ actual income and expenses to see if they could afford to repay their debts. The Means Test formula is based upon IRS collection standards, which may not leave families with enough to realistically live on. It doesn’t seem to reflect the true needs of many families and doesn’t take into account actual spending upon certain necessities such as gasoline or car maintenance. It certainly doesn’t take into account rapidly increasing gas or food prices.

How It Works-A Brief Synopsis

The means test was added to the Bankruptcy Code to create objective standards for determining which individuals are “worthy” of relief in Chapter 7. It applies only to individuals and only those individuals whose debt is primarily consumer debt.

The means test is calculated by comparing the debtor’s average income for the past six months (current monthly income), annualized, to the median income for households of the same size in the debtor’s state of residence. If the debtor’s income is less than or equal to the state median income, the debtor “passes” the means test and may file Chapter 7. The median annual income for San Diego County for a single person is $48,009.00. For a married couple, it is $62,970.00.

The Law Office Of Mark A. Reed