Chapter 7 bankruptcy isn’t available to everyone. It’s for people who don’t have funds left over after paying necessary monthly bills. To determine whether you fit into this category, you must pass a test called the means test. If the results show that you can pay backs some or all unsecured debt for instance, credit card balances, overdue utility payments, and medical bills you’ll have to file for Chapter 13 bankruptcy and pay into a five-year repayment plan. If you don’t have much left over, you’ll have met the requirements to file for Chapter 7 bankruptcy.
It’s a bit misleading to say that you’re eligible to file for Chapter 7 bankruptcy if you “pass” the means test because it’s a two-part calculation. The first part of the means test compares your family income to the median income for your state. If yours falls below the median for the size of your family, you’ve passed and don’t need to complete the second part. You’ll have met the Chapter 7 requirements.
All isn’t lost if your family income is higher than the median you get another chance to pass. The second part of the means test lets you deduct reasonable and necessary expenses from your family income. Any amount left over is your disposable income. If you don’t have enough disposable income to pay into a Chapter 13 bankruptcy repayment plan, you meet the Chapter 7 income requirements
The standard expenses are predetermined amounts that represent national and regional averages. You’ll find them in charts developed by the Internal Revenue Service. The purpose of the standardized values is to help ensure that a filer living an extravagant lifestyle can’t take advantage of a Chapter 7 filing. Here are a few examples:
• food and clothing
• housekeeping supplies and personal care
• some housing expenses and utilities
• standard mortgage or rent expense (or the actual mortgage payment, whichever is higher), and
• transportation costs.
You’ll be able to use some of your real expenditures, as well, including:
• federal and state income taxes
• employment-related expenses (like union dues, uniforms, required 401(k) contributions)
• life insurance
• court-ordered payments
• health insurance
• education expenses for children under 18 (subject to a monthly maximum)
• charitable contributions (up to 15% of gross income), and
• payments for secured debts (such as a house or car payment).
The amount remaining after deducting all these expenses from your income is your disposable income for the month. You’ll multiply that figure by 60 to determine your total disposable income for a 60-month plan. Next, you’ll compare your total disposable income to the means test amounts (these figures are due to be adjusted in 2019):
• Passing the means test: If the total for 60 months is less than $7,700, you’ve “passed” the means test.
• Failing the means test: If the total is more than $12,850, you’ve “failed” the means test.
• Additional step: If the total disposable income falls between $7,700 and $12,850, the means test adds one more step. It multiplies the total of your non-priority unsecured debt (like credit cards, medical bills, signature loans) by 25%. If that amount is less than your disposable income, you’ve “passed.” Otherwise, you’ve failed.
You’ll Need To Overcome the Presumption of Abuse
The court presumes that a debtor who fails the means test is abusing the Chapter 7 bankruptcy process. But you might be able to overcome the presumption of the abuse. To do so, you’ll have to show that you have exceptional circumstances that the test doesn’t account for, that you have a good reason for expenses that are higher than typically allowed, or that your future income will be less than the amount used for the means test. An example of exceptional circumstances would be the higher than usual expenses experienced by the victims of catastrophic storms. The courts must consider these costs and make other reasonable accommodations for victims filing for Chapter 7 bankruptcy when possible, such as waiving particular document requirements.
The Means Test
With the enactment of the Bankruptcy Abuse and Consumer Protection Act of 2005 (“BAPCA”), bankruptcy debtors are now required to pass a “means test” in order to qualify for Chapter 7 bankruptcy. Read on to learn more about whether you qualify to file for Chapter 7 bankruptcy.
Passing the Means Test
In order to pass the means test, you must have little or no disposable income. To determine whether you qualify for Chapter 7 bankruptcy, the means test compares your average monthly income for the six-month period preceding your bankruptcy against the median income of a similar household in your state. If your income is below the median, you automatically qualify.
Your Options If Your Income Is Above the Median
But what happens if your income is above your state’s median? Many debtors think that such a scenario represents the endgame for them, that there is no way they can file a Chapter 7 bankruptcy with their income being so high. This is not necessarily true. If your income is above median, you must complete the entire means test form instead of qualifying simply based on your income. The means test is essentially a balancing stage where your expenses are weighed against your income. But keep in mind that you can only use your actual expenses for certain items. For many expenses, the means test only allows you to deduct the national or local standard living allowance. If deducting all allowable expenses from your income results in little or no disposable income, you can file for Chapter 7 bankruptcy. If your expenses are less than your net income, you probably cannot file a Chapter 7. While this may seem simple enough to determine, bear in mind that the value of a given expense depends on a number of complicated formulas. For this reason, it is very important to speak with an experienced bankruptcy attorney before taking any course of action.
How to Qualify for Chapter 7 Bankruptcy
If you’re struggling with debt, you may consider filing Chapter 7 bankruptcy to wipe the slate clean and start over with no outstanding debts. A Chapter 7 bankruptcy is a type of bankruptcy in which certain property is sold and used to repay all or some of your debts. If you don’t have property that can be resold, many of your debts will be discharged, or cancelled, at the end of the bankruptcy case. Not everyone is eligible to file Chapter 7 bankruptcy, particularly people with high incomes who could afford to repay their debts through Chapter 13 bankruptcy. Here is a list of criteria that qualifies you for Chapter 7 bankruptcy. The bankruptcy means test compares your monthly income of the state’s median family income for a family of your size. If your monthly income exceeds the state’s median income, you may not be able to file Chapter 7 bankruptcy. The means test is required if more than half your debt comes from consumer purchases rather than business, tax, or tort debts. Tort debts are debts for injuries or damages you caused to someone else. If your income does not meet the means test, it could indicate that you have enough money left after paying bills to repay some of your debts. The bankruptcy law prevents people from repeatedly running up debts and having them discharged in bankruptcy court. You aren’t legally able to file Chapter 7 bankruptcy if you had a previous Chapter 7 bankruptcy discharge within the past 8 years or a Chapter 13 bankruptcy discharge within the past 6 years. The filing period starts from the date your previous bankruptcy was filed rather than when the bankruptcy was discharged.
You have not had a recent bankruptcy dismissal.
You can’t file Chapter 7 bankruptcy if you had a bankruptcy dismissed within the past 180 days for any of these reasons: you violated a court order, abused the bankruptcy system, made a fraudulent bankruptcy filing, or requested a dismissal because a creditor requested the automatic stay be lifted.
You must receive credit counselling.
To file any type of bankruptcy, you must receive credit counselling from a government-approved credit counselling agency. You don’t have to get counselling before filing bankruptcy, but you must complete it no more than 180 days prior to your bankruptcy discharge. Part of the credit counselling must include a two-hour financial management course. Agencies that offer this course aren’t always non-profit, but they should be able to offer free or lower cost services to you if you can’t afford the full price. The Office of the U.S. Trustee has a state-by-state list of approved agencies. If you don’t receive your credit counselling within the specified time frame, your bankruptcy case will be dismissed.
Who Must Take the Means Test?
Not everyone. For instance, business entities and certain members of the military are exempt. Individuals whose total debt is primarily business debt (debt incurred while engaging in profit-making activities) also don’t need to meet Chapter 7 means test requirements.
Do I Qualify for Chapter 7 Bankruptcy?
To qualify for Chapter 7 bankruptcy, your disposable income must be low enough to pass the means test. A chapter 7 bankruptcy provides very thorough relief from debt by wiping out most unsecured debt and allowing the debtor to have a fresh start. To prevent consumers from abusing the system, however, Congress has provided eligibility requirements for filing a Chapter 7 case. Here are the main requirements to qualify for Chapter 7 bankruptcy relief.
If you filed a Chapter 7 petition and received a discharge in the past, you must wait eight years from the filing date of the previous bankruptcy before filing another one. If you filed a previous Chapter 7 case but did not complete the case and did not receive a discharge, you may file a new Chapter 7 at any time, provided the court in the previous case did not bar you from filing again and you otherwise qualify for Chapter 7. If you previously filed and received a discharge in a Chapter 13 bankruptcy case, you must wait six years from the date that Chapter 13 was filed before filing for Chapter 7. If you did not complete or receive a discharge in the previous Chapter 13 case, you can file a Chapter 7 case at any time assuming you otherwise qualified for Chapter 7.
Pre-bankruptcy Credit Counselling
Before you file for Chapter 7 bankruptcy, you must complete a pre-bankruptcy credit counselling course conducted by an approved agency. You must complete this course within six months prior to the date you file for bankruptcy. Once the counselling is complete, you will receive a certificate that you must file with the court.
Not Qualifying After Passing the Means Test
Many debtors don’t realize that you still might not qualify for Chapter 7 bankruptcy after passing the second portion of the means test. The means test is based in part on national and regional averages for certain expenses. In a separate part of your bankruptcy paperwork, you’ll provide a list of your actual expenses. If you’re actual expenses are much less than the means test, you could have more disposable income than the calculation would suggest. Here are two scenarios to illustrate:
• You live at home with your parents and pay no room and board, but you take home $2,500 a month from your job. On the means test you can deduct a standard amount for food and household expenses, but under these circumstances, you have no real food or household expenses. The court will use your actual disposable income and expect you to pay into a Chapter 13 repayment plan.
• You have a large payment for a luxury item like a loan to finance a timeshare membership. As a secured debt, you can deduct that as an expense on the means test, but the court will likely disqualify it because it isn’t a reasonable and necessary expense, freeing up more disposable income.
If You Fail the Means Test
If you fail the means test, you have three options:
• Don’t file for bankruptcy. You can choose not to file bankruptcy at all. You can look for alternatives like negotiating lower payments or working with a credit counsellor on a debt management plan.
• File Chapter 13 bankruptcy. You can file a Chapter 13 bankruptcy case and propose a plan to pay your debts over a five year period.
• Overcome the presumption of abuse. You can file a Chapter 7 case and attempt to justify it to the court. If the court rules against you, you can still convert (transfer) your case to Chapter 13 bankruptcy.
Bankruptcy Chapter 7 Attorney
When you need legal help with the Means Test for Chapter 7 Bankruptcy in Utah, please call Ascent Law LLC for your free consultation (801) 676-5506. We want to help you.
8833 S. Redwood Road, Suite C
West Jordan, Utah
84088 United States
Telephone: (801) 676-5506