Bankruptcy Alphabet-M is for Means Test

Significant changes to the 2005 Bankruptcy overhaul law (known as BAPCPA for “Bankruptcy Abuse Prevention and Consumer Protection Act”) gave us attorney practitioners more regulation, required potential debtors additional paperwork in the form of credit counseling, and forced attorneys to be called “Debt Relief Agencies” (which is a slap in the face to knowledgeable bankruptcy lawyers, because non-attorney bankruptcy petition preparers are called the same thing, but they don’t know bankruptcy law). But none of these have brought more ire than the Means Test.

               M is for Means Test

Photo by Leo Reynolds

As the name infers, this is a test to determine certain qualifications related to the debtor’s bankruptcy filing. Specifically, it determines whether a debtor qualifies for Chapter 7 Bankruptcy and if not, how long of a Chapter 13 Bankruptcy Plan must last and how much money should go each month to general unsecured creditors in a Chapter 13 Plan.

What’s the point of the means test?
The concept is to only allow those debtors to file Chapter 7 liquidation who need it most. If a debtor has some money to put into a Chapter 13 plan, Congress wants you to file Chapter 13 and pay some of your debt back.

How does it work?
Without going into all of the little intricacies of the formula, the basic description is an income minus expenses test. You might think, “Great, we have Schedule I & J in the Bankruptcy Petition that includes my current income and expenses, we use that right?” Nope. Well, if we don’t use actual income and expenses, what do we use? Congress has mandated that we average the last 6 months of your income to come to a “current monthly income” amount and then instead of your actual expenses, Congress has standardized most expenses. A one size-fits all concept of expenses. One big problem is that the standard expenses are, for the most part, inadequate. And if you didn’t think that was confusing enough, this means testing calls your average income your “current monthly income”. That’s right. Two different things called your current monthly income. (You can see why Bankruptcy Attorneys and Judges hate it.)

The basic concept to determine whether you qualify for Chapter 7 Bankruptcy is two-fold: First, we determine whether your current monthly income (the average income) multiplied annually is greater than the average annual income for a family of your size in your jurisdiction (another standard). If it is lower, congratulations, you qualify for Chapter 7 bankruptcy, if it is in your best interests. But what if you are higher?

Then we jump to the second hurdle where the standard expenses are subtracted from your current monthly income (the average income) giving us a “current disposable monthly income” (DMI).

Now, we take the DMI and multiply it by 60. If this new amount is less than $7,025 (until April 2013), you qualify for Chapter 7. If the amount is greater than $11,725 (until April 2013), then you don’t qualify for Chapter 7. What about between those two figures?

Well, then we take the amount of your general unsecured debt and multiply it by 0.25. If your DMI multiplied by 60 is less than the debt figure, then you qualify for Chapter 7, if not, you don’t. The test ends there.

What about the Chapter 13 stuff?
The means test tells us two things about Chapter 13: how long your plan must be and what must be paid to unsecured creditors.

Easy one first: If you don’t qualify for Chapter 7 under the test, then your plan must be for 60 months. If you would have qualified for Chapter 7, then your plan must be at least 36 months.

To determine the amount that must be paid to your unsecured creditors, we simply take your current monthly income (your average income) and minus your standard expenses, whatever the amount is must be paid to your unsecured creditors over the plan.

What if my expenses are greater than my income?
If your standard expenses are greater than your income, then you are not required to pay your unsecured creditors anything under the plan (almost-that’s another discussion for another time).

Does that mean I can be in Chapter 7?
Nope. That’s another criticism of the means test.

Other Bankruptcy Lawyers talking about the Letter M are as follows:
Means Test-New York Bankruptcy Lawyer, Jay S. Fleischman
Modify-Northern California Bankruptcy Lawyer, Cathy Moran


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