When filing for bankruptcy relief, you are required to complete the Means Test before continuing with filing your paperwork. In 2005, Congress implemented the Means Test as a part of the Bankruptcy Abuse Prevention and Consumer Protection Act to prevent anyone from taking advantage of the system. It serves as a measurement for determining which chapter you qualify to file under. In other words, the Means Test determines whether your income qualifies you for Chapter 7 relief or if it is large enough to support you through a Chapter 13 filing.
Our team of dedicated bankruptcy attorneys has extensive knowledge when completing the Means Test. We will ensure that the test is properly completed and your options are properly laid out for your based on the results. Please contact our office if you are interested in discussing more!
COMPLETING THE MEANS TEST
The Means Test measures your income levels and compares them to other households in your area. The Means Test can be divided into two separate parts. All filers are required to complete the first portion of the test. Depending on what you have listed in the first portion will determine whether or not you are required to complete the second half of the test.
The first part of the Means Test requires debtors to list their total income for the previous 6 months. If you were employed for a period of this time but are currently unemployed, the Means Test will take this into account. This portion of the Means Test will evaluate your income in comparison to the median income in your area. To do so, the test will ask for your monthly income, which includes any additional payment received through bonuses or assistance such as child support and alimony. Your total monthly income is then multiplied by 12 to determine your annual income. The annual income is then compared with the median income for a household of the same size in the same state. If the reported annual income is less than the median and there are no signs that the debtor intends to abuse the system, they have successfully completed the Means Test. Additionally, debtors will be qualified for a Chapter 7 filing. However, debtors may still be able to file a Chapter 13 if it best suited for them.
If the reported annual income is greater than the median, the debtor must continue to the second portion of the test. Here, expenses are deducted from the reported income. For example, necessities such as clothing, rent, groceries, and medical bills are subtracted from the debtor’s monthly income. If the calculated monthly disposable income is less than a certain amount, the debtor cannot afford to file a Chapter 13 and may benefit more from a Chapter 7 filing. If the reported monthly disposable income is higher than a certain amount, the debtor fails to “pass” the Means Test and cannot file for Chapter 7 relief.
PASSING THE MEANS TEST
If you pass the Means Test, you may proceed with a Chapter 7 filing. To do so, you will file all necessary paperwork with the Court, disclosing all financial information. A trustee will be appointed to your case to liquidate all unexempt property. The money resulting from the liquidation is used to pay any outstanding balances with creditors.
Passing the Means Test does not mean that Chapter 7 is the best option for you. The Means Test only considers income as a deciding factor, while it is important to look at several other factors when determining which chapter of bankruptcy you should file. Chapter 7 will allow you to forgive most of your unsecured debts and have them discharged by utilizing a liquidation process. If you hope to retain more of your property and want to catch up on your debts, it may be more beneficial for you to file a Chapter 13 Bankruptcy instead. If you have passed the Means Test and are unsure whether or not a Chapter 7 filing is best suited for you, contact your attorney to review your options and determine which will provide you with the best outcome.
FAILING THE MEANS TEST
If you fail to pass the means test, this may mean that you have enough monthly disposable income to be able to pay off your debts. Similar to passing the Means Test, failing to pass does not automatically mean you must file a Chapter 13 Bankruptcy. If you do decide to file a Chapter 13, then you may continue with the process. Once your paperwork has been filed with the Court, you will follow a repayment plan to clear outstanding balances over the next 3 to 5 years. Upon completion of the plan, your remaining debts may be cleared, and your case will be discharged.
If you and your attorney do not feel it is in your best interest to file a Chapter 13, you can hold off and approach some other options. One of these may be working with your creditors to establish a debt settlement program if you can afford to do so. Another option is to retake the test in 6 months and see if your situation has changed at all. If you are in need of bankruptcy relief but are still unable to pass the test, you may then consider continuing with a Chapter 13 filing.
IS THE MEANS TEST REQUIRED WHEN FILING FOR A CHAPTER 13 BANKRUPTCY?
If you do not intend to file a Chapter 7 and are planning on filing a Chapter 13, you are still required to complete the Means Test. In a Chapter 13 Bankruptcy, the Means Test can be used to determine how long your repayment plan should last. If your reported annual income is less than the median income for your household size, you will qualify for a 3-year repayment plan. In addition, you will qualify for a 0% plan and might not have to pay your general unsecured creditors.
Unless your income is greater than the median, you do not need to complete part two of the Means Test. If your income is above the median, you will automatically be given a 5-year repayment plan and must pay the required amount to your creditors. However, if your calculated disposable income results in a negative balance, you will not be required to pay the unsecured creditors. If the resulting number is positive, this determines the amount you will pay your creditors.
HOW CAN WE HELP?
The Means Test can play an important role in determining how you should proceed with your bankruptcy filing. If you are considering filing for bankruptcy, contact us today to speak with an attorney about the Means Test. By providing us with all necessary information, we will consider additional factors and help guide you through the Means Test. From here, we can determine what your best option may be.
We help clients in the following areas: Modesto, Stockton, Turlock, Ceres, Empire, Escalon, Hughson, Lathrop, Linden, Manteca, Oakdale, Patterson, Ripon, Riverbank, Salida, Tracy, Waterford