The means test is designed to determine whether a Chapter 7 filing is presumed to be an abuse of the Bankruptcy Code. If the debtor is unable to overcome the presumption, the case will need to be dismissed, or converted to a case under Chapter 13 or Chapter 11.
The means test only applies to debtors that owe primarily consumer debts. This excludes debts that were incurred for a business purpose, tax debt, and possibly student loan debt that was incurred for professional school loans or technical training.
For the means test, income is measured by taking the monthly average of all funds received by the debtor over the six calendar months preceding the month of the bankruptcy filing. If that amount, when multiplied by 12, is less than the median state income for a household of the same size as that of the debtor, there is no presumption of abuse and monthly expenses need not be considered. Social security benefits do not count as income for means testing purposes.
If the debtor’s income is above the median, monthly expenses are considered to arrive at a monthly net disposable income. The means test is not based on actual living expenses, but uses fixed numbers for food, clothing, housing, utilities, medical care and the like, based on the debtor’s geographic location, with a limited opportunity to include higher amounts based on the debtor’s particular circumstances. Also included are payments on any outstanding priority claims which would otherwise be entitled to payment in full in a hypothetical Chapter 13 case.
In most consumer cases, the means test is a hurdle, not a roadblock, to a Chapter 7 filing.
The means test will determine whether you are eligible to file a Chapter 7 bankruptcy, and eliminate all dischargeable debt in a matter of months. Whether you “pass” the means test is determined by the information that you provide on Bankruptcy Form 122, which sets forth your location, your household size, and your average household income over the past six months.
If you pass the means test, you are one step closer to filing a Chapter 7 bankruptcy. If you do not pass the means test, your best option may be the filing of a Chapter 13 bankruptcy.
A Quick Example
The means test is best explained with an example. If you are married with two children and live in Washington State, you can have an annualized income of approximately $86,000 and still qualify for a Chapter 7 bankruptcy.
That said, there are nuances within the means test may allow you to file a Chapter 7 bankruptcy even if your income is greater than the median income for your state and household size.
Will You Pass The Means Test?
During our first meeting, we’ll ask you some basic threshold questions to determine whether the means test will be an issue in your case. To do so, we’ll need to determine the amount of gross income received during the past six months; the amount of your secured debt payments, if any; and the amounts of other living expenses.
With this information, we’ll have an idea of whether the means test will be an obstacle to file a Chapter 7 bankruptcy. And even if it is an obstacle, the experienced attorneys at Davidson Backman Medeiros PLLC may be able to find a way to qualify you for a Chapter 7 bankruptcy filing.
Chapter 7 Bankruptcy
If you pass the means test, you are probably eligible to file a Chapter 7 bankruptcy, and we’ll help you decide if this is the right choice for you. This type of bankruptcy is usually resolved quickly and simply. Why? A Chapter 7 bankruptcy is designed for those who simply cannot keep up with their debts each month, and could never pay them off within a reasonable time.
A Chapter 7 bankruptcy will discharge most types of unsecured debts, such as credit cards, medical bills, past due rent and utility bills, and personal loans. You may also choose to discharge your personal liability on secured debts. If you want to keep your car or house, you’ll need to stay current on the payments and insurance, but some people use bankruptcy as an opportunity to give up a car or a house that they can no longer afford.
Some debts, such as alimony, child support, recent taxes, and student loans are generally not discharged in a Chapter 7 bankruptcy.
Chapter 13 Bankruptcy
If you don’t pass the means test and have some disposable income available for some payments but still need debt relief, you may wish to consider a Chapter 13 bankruptcy. This is a restructuring of your debt that allows you to make payments to a trustee for three to five years.
The trustee distributes these payments to your creditors in accordance with your repayment plan. At the end of your repayment plan, the remainder of most types of debt is discharged. Your monthly payment to the trustee should be lower than what you were paying to your creditors. Most people that file Chapter 13 bankruptcy pay much less than was originally owed, while keeping all of their assets.
In addition to these basic guidelines about the means test and Chapter 7 and Chapter 13 bankruptcy, there are many more detailed and nuanced requirements and procedures that must be understood prior to filing for bankruptcy relief. We can help you navigate these requirements, while ensuring that you choose the best bankruptcy relief available.
About Davidson Backman Medeiros PLLC
Davidson Backman Medeiros PLLC helps individuals file for bankruptcy under Chapter 7 and Chapter 13 in Spokane, Seattle, and throughout Washington and Idaho. We’d appreciate hearing from you with your comments and suggestions.