The Bankruptcy Means Test is a tool used by the United States bankruptcy court system to determine whether an individual filing for bankruptcy is eligible for Chapter 7 bankruptcy or if they must instead file for Chapter 13 bankruptcy. The test compares the individual’s income to the median income for their state and family size, and also takes into account certain expenses such as taxes and housing costs.
The means test was implemented as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which aimed to prevent individuals with high incomes from taking advantage of the bankruptcy system by filing for Chapter 7 bankruptcy, which allows for a discharge of most unsecured debts. Instead, these individuals would be required to file for Chapter 13 bankruptcy, which involves a repayment plan over a period of three to five years.
To begin the means test, an individual must first calculate their current monthly income (CMI), which is determined by averaging their income over the six months prior to filing for bankruptcy. The CMI is then compared to the median income for their state and family size, as determined by the United States Census Bureau. If the CMI is below the median, the individual is generally eligible for Chapter 7 bankruptcy.
However, even if an individual’s CMI is above the median, they may still be able to file for Chapter 7 bankruptcy by passing the “disposable income” test. This test compares the individual’s CMI to their allowable expenses, such as taxes, housing costs, and certain other necessities. If the individual’s disposable income, or the amount of income left over after these expenses have been taken into account, is low enough, they may still be eligible for Chapter 7 bankruptcy.
On the other hand, if the individual’s disposable income is too high to qualify for Chapter 7 bankruptcy, they may be required to file for Chapter 13 bankruptcy. In Chapter 13 bankruptcy, an individual must propose a repayment plan to repay a portion of their debts over a period of three to five years. The plan must be approved by the bankruptcy court, and the individual must make payments to a trustee who will distribute the funds to their creditors
It’s important to note that not all debts are treated the same in bankruptcy. Secured debts such as mortgages or car loans generally must be paid back under Chapter 13. The individual’s unsecured debts, such as credit card balances or medical bills, may be discharged or paid back at a reduced amount.
It’s also worth mentioning that certain types of debts, such as student loans and back taxes, are generally not dischargeable in bankruptcy. So, even if an individual passes the means test and is eligible for Chapter 7 bankruptcy, they may still be responsible for paying back these types of debts.
In conclusion, the Bankruptcy Means Test is a tool used by the United States bankruptcy court system to determine whether an individual filing for bankruptcy is eligible for Chapter 7 bankruptcy or if they must instead file for Chapter 13 bankruptcy. The test compares the individual’s income to the median income for their state and family size, and also takes into account certain expenses such as taxes and housing costs. It’s important for individuals to understand the means test and how it applies to their specific situation before filing for bankruptcy. Consulting with a bankruptcy lawyer in Prattville can be extremely helpful in this process.
