Bankruptcy Means Test and Qualifications
The Income Bankruptcy Means Test
Under the new rules, the first step is determining under which Chapter of the Bankruptcy Code a debtor is able or desires to file. The guide to determine whether a debtor qualifies to file bankruptcy is known as the “Bankruptcy Means Test.”
- The bankruptcy Means Test calculation measures a debtor’s current monthly income against the median income for the same size of family in the state in which the debtor lives.
- If a debtor’s income is less than the median for the debtor’s household size, the full bankruptcy Means Test does not apply. In most situations, debtors who desire to file bankruptcy usually fit within the allowed income requirements under the new laws.
- Under the bankruptcy “Means Test,” if your current monthly income is less than the median income in your state, you are eligible to file for bankruptcy under Chapter 7.
For example, in California as of May 1, 2016, an individual who earned less than $50,579 per year could file Chapter 7. A family of two could earn $66,537, a family of three $70,816, and a family of four $81,837. These amounts increase for bankruptcy cases filed on or after April 1, 2016. To access specific information regarding the current income requirements and median income for California and other individual states click here. The bankruptcy Means Test figures are generally updated twice a year.
If your current monthly income is above the median income in your state, however, there is a second step to the bankruptcy Means Test that determines a debtor’s disposable income and may bring a debtor within eligibility of the Means Test standards.
One of these factors is whether, based on the Means Test calculations, you can afford to pay $100 per month toward paying off your debt. For debtors over the allowed income, the Means Test formula takes into consideration your monthly income, various expenses (secured indebtedness, child care, healthcare costs, income tax deductions, etc.) and the total amount of your unsecured debt.
Debtors that do not qualify under the new rules may not be eligible to file a Chapter 7, and may have to pay back some or all of their debts over a 3 to 5 year period under a Chapter 13 repayment program.
Bankruptcy Means Test Pitfalls
Current monthly income, as defined by the bankruptcy laws, may not necessarily reflect a debtor’s current income at the time they file the bankruptcy. Average income is calculated based on a debtor’s average income over the last six months before they file. For people who are filing for bankruptcy because they recently lost a job, their “current monthly income” according to these rules most likely will be much more than they take in each month by the time they file for bankruptcy.
The bankruptcy forms required by the Bankruptcy Court are extensive. A typical bankruptcy consists of 60 to 80 pages of documentation! Choosing an experienced bankruptcy petition preparer to prepare your Chapter 7 bankruptcy is a simple way to prepare your bankruptcy documentation. Keep in mind that a BPP is a self-help service, which means that in the end, you are responsible for the outcome of your legal paperwork. Most importantly, a BPP cannot provide legal advice. It is important that you, as a debtor, understand the bankruptcy process.