The “Means Test” was added to the bankruptcy process in 2005. This can be tough for some to do that have a low income, but they might be able to repay the debt under Chapter 13.
The means test was added to the bankruptcy process by BAPCPA in 2005 to make it more difficult for some consumers to file Chapter 7 Bankruptcy. Those people with an ability to repay the debts must file a Chapter 13 Bankruptcy instead.
Most individual debtors filing for bankruptcy relief are required to complete the means test forms. The Court uses the means test to determine whether they can afford payments to their creditors.
If the total household income is less than the average income in the state, the debtor has passed the means test and is eligible to file a Chapter 7 Bankruptcy.
If the total household income is more than the average income in the state, then they must complete the means test formula. The means test allows to subtract taxes, insurance, and other deductions from their pay check and the actual living expenses from the gross income to determine the disposable monthly income. This is the amount that must be committed each month to repay the creditors.
Some of the deductions are determined by personal budget such as income tax, health insurance, child care, charitable contributions, etc.
Some of the deductions are determined by using the standard IRS allowance such as rent, utilities, vehicle expenses, etc.
Here is an explanation of the decision between Chapters 7 and 13:
First, split all of the debt between 2 buckets. It sounds silly, but stick with it, it makes sense.
Bucket 1 is the debt that debtors are going to keep paying. Most taxes, child support arrears and secured debts such as mortgages and car loans for property that they want to keep will go into bucket 1.
Bucket 2 is all of the stuff they don’t want to and don’t have to pay. Credit cards, medical bills, payday loans and all other non-priority unsecured debts. Bucket 2 also contains the secured debt for vehicles that are being surrendered as part of the bankruptcy.
Now there is two buckets to deal with. Bucket 1 is stuff that they will continue paying, Bucket 2 is everything else.
Chapter 7 dumps out bucket 2 and lets debtors deal with bucket 1 on their own. If they are current on their house and car and don’t need help paying off taxes, etc., this is probably the choice for them. It is faster, easier and cheaper but doesn’t help with any of their bucket 1 debt.
If debtors are behind on the house or car and need help getting caught up, Chapter 13 is likely the chapter for them. Chapter 13 allows the set up of a payment plan to pay off the debts or arrearages in bucket 1 and only as much as they can afford to pay of the debts in bucket 2. Any bucket 2 debts that they can’t afford to pay over the life of the Chapter 13 payment plan gets dumped out just like it would have in a Chapter 7. Chapter 13 does not require that they pay 100% of all debts. Remember, however, that debtors have to show the judge that they can afford to pay for everything they have placed in bucket 1. If they can’t afford the car, for example, the Court is going to require that it go into bucket 2 to be surrendered.
“There are a few other fact specific issues that may push us one way or the other such as income restrictions and debt limits. Our attorneys will help you figure it all out at a free consultation appointment.”
For more information go to https://www.jeppsonlawoffice.com/means-test/