Articles - What is the "Means Test?"
Effective October 17, 2005, the Bankruptcy Abuse Prevention and
Consumer Protection Act of 2005, aka the “new bankruptcy law” became
effective. The law imposes certain restrictions, when it comes to filing
for bankruptcy. One of the new requirements mandates that bankruptcy
filers pass a “means test”.
The “means test” is a calculation that determines whether a
bankruptcy filer has enough disposable income to file under chapter 7 or
chapter 13. Chapter 7 allows bankruptcy filers to walk away from their
debts after giving up most of their secured assets. If you are fail the
“means test,” chapter 13 may be an option. Chapter 13 requires filers to
pay back their secured debt and as much of their unsecured debt as
possible.
The “means test” will be triggered, if a filer’s monthly income is
greater than their state of residence’s median household income after
adjustments inflation and size of family. To determine if a bankruptcy
filer passes the “means test” a filer’s attorney must do the following:
· Take your monthly income and subtract certain allowed expenses in
the amounts determined by the IRS. These expenses don’t include things
such as food, gas, clothing Note: Under the new law, your monthly income
is calculated as your average income over the past 6 months. So, if you
lost your job 3 months ago and currently have no income, your monthly
income would be determined not as what you truly earn at the moment but
your average over the past 6 months.
· Subtract payments on secured debts such as mortgage, rent payments
and car loans
· Subtract payments on priority debts such as child support, alimony,
tax debts, wages to employees and $1500 in school tuition
If what is left over is less than $100, then you pass the “means
test”. If what’s left over is more than $166.66 then you fail the “means
test” and are not eligible for chapter 7.
If what is left is between $100 and $166.66 then the attorney has to
determine, if you can repay 25% of your unsecured debts (credit card
bills, medical bills, student loans, etc) over 5 years. If you can repay
the debts, then you fail the “means test”. If you cannot repay the
debts, then chapter 7 is still an option for you.
For additional information refer to
New Bankruptcy Law – A Summary of Changes You Should Know About
|
