Applying the New "Means Test" to Determine

Eligibility for Chapter 7 or Chapter 13

Here is a rough guide to help you figure out whether or not you may still qualify for Chapter 7 under the new bankruptcy law.

Question #2. Is your current monthly income (averaged over the past six months) more than the median income for your state?

To determine the median income for your state, please refer to the Median Income Chart.

If YES, go to Calculation Step below. If NO, you MAY be able to file Chapter 7.

Calculation Step (prior to Questions #3 and #4). Take your current monthly income minus your living expenses (excluding payments on the debts you are trying to discharge through bankruptcy) and multiply by 60. We'll call this figure the RESULT of the Calculation.

Question #3. Is the RESULT of the above calculation equal to $10,000 or more?

If NO, then go to Question #4. If YES, then you will have to file a 5-year repayment plan under Chapter 13.

Question #4. Is the RESULT of the above calculation less than $6,000?

If NO, then go to Question #5. If YES, then you MAY be able to file Chapter 7.

Question #5. Is the RESULT of the above calculation equal to or greater than 25% of the unsecured debt?

If NO, then you MAY be able to file Chapter 7. If YES, then you will have to file a 5-year repayment plan under Chapter 13.

EXAMPLES

Here are some hypothetical examples to help you figure out where you might stand using the above rough guide to the new bankruptcy law.

Example 1:

Family with 2 people working

Family lives in California

Current combined monthly income = $2,000

Current monthly expenses = $1,800

Unsecured debt = $25,000

The chart for median income for California, 2 earners, shows the median at $74,638 per year, which is $6,220 per month. Since this family is well below the median income for California, they will most likely qualify for Chapter 7 bankruptcy.

Example 2:      

Single individual

Person resides in Texas

Current monthly income = $3,500

Current monthly expenses = $3,350

Unsecured debt = $25,000

The chart for median income for Texas, single earner, shows the median at $33,280 per year, which is $2,773 per month.

Since this person is above the median income for the state, we need to do the Calculation Step associated with the means test, and then move to Question #3. So current income ($3,500) less expenses ($3,200) equals $150, times 60 equals $9,000 as the RESULT of our calculation.

Applying Question #3, the RESULT of $9,000 is not $10,000 or more, so we move to Question #4. Since the RESULT of $9,000 exceeds the $6,000 "floor" of the means test, we then move to Question #5. Since the available income of $9,000 is greater than 25% of the debt ($25,000 times 0.25 equals $6,250), the debtor will not be permitted to file Chapter 7, but instead will be required to file a 5-year repayment plan under Chapter 13.

Why It May Actually Be Worse Than These Examples Show!

In the above examples, we have ignored a very important provision of the new code. The figures above for monthly living expenses are assumed to be consistent with the IRS approved expense schedules that the courts will use to determine allowable expenses when figuring the means test. A big problem here for most consumers is that their household budgets may not reflect the more harsh realities of the IRS schedules. So if you do the above calculations based on your ACTUAL household budget for expenses and figure that you will be able to qualify for Chapter 7, you MAY STILL NEED TO FILE UNDER CHAPTER 13. That's because some of your actual expenses may be disallowed or reduced under the IRS schedules, so your expenses "on paper" may come out lower than they really are. Under the new law, that's just how it is! You're stuck with the court-determined expense schedule whether or not it reflects your existing household budget. It is expected that many debtors will be forced to give up such "luxuries" as cell phones, cable TV, etc., in order to free up funds to make the court-ordered creditor payments. What remains to be seen is how the courts will handle cases where the cost of mortgages or home rentals are inflated well-above the government schedules. Will debtors be expected to move into cheaper housing to meet the court's required schedule for living expenses? No one has any answers to these questions yet. It will be up to the courts to interpret the new law in practice as cases proceed through the filing system.

© Copyright 2005. Manchester Publishing Company. All rights reserved.

Notice: This site is intended to provide general information only. The author is not an attorney and does not provide legal advice. The information provided herein is not intended to provide definite or specific advice with respect to bankruptcy. The consumer should seek the services of a licensed professional to determine filing eligibility for bankruptcy.