In 2005 Congress Changed the Law and Required that a Debtor Qualify for Chapter 7 based on the results of Income Calculations in the Means Test.
The Means Test is a Calculation of the Debtor’s Income and Living Expenses not Counting Debt to be Discharged. The Test is a Two Part Test.
1. Current Gross Monthly Income for the Past Full Six Months is Compared to the Median Monthly Income in a Household the Same Size as the debtor’s and in the debtor’s home state. Current Gross Monthly Income is defined by rules requiring precise calculations. If the debtor’s income is less than the median income, the debtor is qualified to file a Chapter 7. Median Income Data Comes From the Census Bureau.
2. If the Debtor’s Income is Higher than the Median Income, The Attorney Must do Further Calculations to see if you can File for Chapter 7 Bankruptcy. Your Attorney Must Subtract The Court Allowed Monthly Living Expenses (as determined by IRS guidelines) From Your Monthly Gross Income, which will give you your Disposable Income. This is where it gets complicated:
3. If your Projected Disposable Income over the Next Five Years Totals Less Than $6,000 ($100/month), you pass the Means Test and can File under Chapter 7.
4. If your projected disposable income over the next five years is greater than $10,000, you fail the Means Test and will not be allowed to file Chapter 7.
5. If your projected disposable income is between $6,000 and $10,000, The Attorney must do another Calculation. It involves a Comparison of your Disposable Income Over the Next Five Years to a Percentage of your Unsecured Debt to Determine Whether any Significant Repayment to your Creditors is Possible.
If there is enough disposable income over that five year period to be greater than 25% of your unsecured, non-priority debts, you fail the Means Test and cannot file under Chapter 7. If your disposable income over a five year period is less than 25% of your unsecured, non-priority debts, you pass the Means Test and can file a Chapter 7 bankruptcy.
The Means Test Demonstrates that there is not enough money to fund a Chapter 13 repayment plan that would at least pay back 25% or more to your Creditors.
If you cannot file under Chapter 7, you can consider filing under Chapter 13. A chapter 13 bankruptcy is a 3 to 5 year debt repayment plan. In a Chapter 13 bankruptcy, your payment plan is based upon what you can afford to pay your creditors, not on what your creditors want you to pay.
Online forms and paralegals can not accurately determine if you qualify because there are many variables and usage of national standards as well as income variations that can affect whether you qualify or not.
Our attorneys will do the “means test” calculation to determine if you are eligible to file under Chapter 7 or if you have to file chapter 13.