Overview of the bankruptcy means test

| Jun 10, 2021 | Chapter 7 |

If consumers in Newport Beach, California, are overwhelmed with debt, they may be able to get relief through bankruptcy and remove some debt. Many debtors choose Chapter 7 bankruptcy, which pays off unsecured debt, such as medical debt, by selling assets. However, debtors must pass a means test to qualify for Chapter 7.

The new bankruptcy law

Congress overhauled the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005 in response to debtors taking advantage of bankruptcy. The new law requires a means test to prevent abuse of the system by high-wage earners and encourage more Chapter 13 filings.

Chapter 13 is a reconstruction bankruptcy that allows debtors to repay debts over time. The debtor doesn’t have to sell their assets under Chapter 13, but they must pay all or some of the debt.

Before 2005, consumers could file for Chapter 7 bankruptcy regardless of their income. Congress amended U.S.C. Code 707B to allow courts to dismiss or convert Chapter 7 bankruptcy cases with higher income.

How the means test works

The means test has two parts, but the debtor may not be required to pass both parts. The first part of the test compares six months of a debtor’s income to the average income of their state for a household of the same size. If the debtor’s disposable income falls below the median, they pass without further testing needed.

If the debtor’s income surpasses the median, the court determines their disposable income using allowable expenses. Debtors with a disposable income of less than $136 per month commonly pass, but debtors with more than $227 in disposable income per month usually can’t file bankruptcy. If a debtor falls between $136 and $227, the court multiplies the income by 60. Debtors do not pass if their income can cover 25% of expenses.

There are few exceptions to the means test, and if cases get dismissed, the debtor must wait to file again. Debtors unsure of what type of bankruptcy to file should seek legal assistance.