Means Test Analysis

What is Means Test? Means test is the eligibility criteria for filing bankruptcy under chapter 7. If you do not pass the test, you would not be qualified to file a bankruptcy under chapter 7. Background of the Provisions: In 2005, the congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) which came into effect on October 17, 2005. Later the significant amendments were occurred within 11 U.S.C. § 707(b)1. The provision intends to make more difficult for debtors to file a bankruptcy under Chapter 7. The provision was amended to provide dismissal or conversion of Chapter 7 case upon finding of abuse by an individual debtor (or married couple) with primarily consumer debt. 11 U.S.C. § 101(10A)2 defines the current monthly income (CMI) as the average monthly income from all sources received by the debtor (and the debtor’s spouse if filing jointly) during a defined 6 month period prior to the filing of the bankruptcy case. It excludes benefits received under the Social Security Act, Payments to victims of war crime or terrorism etc from the purview of CMI. Requirement of Means Test: Means test is mandatory for debtors who intend to file bankruptcy under chapter 7. If the debtor is disabled veteran whose debt was primarily incurred when on active duty or while performing in homeland defense activity are not subject to the means test calculation. [11 U.S.C. § 707(b) (2) (D)3] Other requirements: 1. A debt must be primarily a consumer debt. 11 U.S.C. § 101(8) 4 defines the Consumer Debt as the debt incurred by an individual primarily for a personal, family, or household purpose.

1 2

http://www.law.cornell.edu/uscode/11/usc_sec_11_00000707----000-.html http://www.law.cornell.edu/uscode/11/usc_sec_11_00000101----000-.html 3 http://www.law.cornell.edu/uscode/11/usc_sec_11_00000707----000-.html 4 http://www.law.cornell.edu/uscode/11/usc_sec_11_00000101----000-.html

2. A debtor must have undergone Credit Counseling under Credit Counseling Agencies approved by the United States Trustee5, within 180 days before filing Bankruptcy. 3. If you have already filed a bankruptcy under chapter 7 and got discharged. 8 years must have been elapsed from the date of discharge before filing bankruptcy under Chapter 7 (11 U.S.C. § 727(a)(8) 6. How to calculate the Means Test? Means Test can be calculated in two methods. Method first: 1. Decide when you are filing bankruptcy under chapter 7. And number of months to be calculated for means test purpose. Suppose if you are filing bankruptcy on November 1st, calculate the income of all sources from May to October (i.e. 6 months) 2. List out income from all the sources (i.e. gross income) e.g. employment salary, income from personal and real property and any other source of income. 3. Divide the total income of 6 months by 6. ($........ ÷ 6 = $......). The result will be Current Monthly Income (CMI) 4. Multiple the CMI by 12. ($........ X 12 = $......). (You will arrive at the annual income) 5. Compare the annual income with the State Median Income7.  If the total income is lesser than the State Median Income, you will pass the test and you will be eligible to file bankruptcy under chapter 7 and you need not to worry about or make further calculations.  If you do not pass the means test under method first, follow the second method. Second method: 1. Decide when you are filing bankruptcy under chapter 7. And number of months to be calculated for means test purpose. 2. List out income from all the sources. 3. Divide the total income of 6 months by 6. ($........ ÷ 6 = $......). The result will be Current monthly Income (CMI)

5 6

http://www.justice.gov/ust/eo/bapcpa/ccde/cc_approved.htm http://www.law.cornell.edu/uscode/11/727.html 7 http://www.justice.gov/ust/eo/bapcpa/20101101/bci_data/median_income_table.htm

4. Deduct the CMI in compliance with state allowable expenditures as per IRS National and Local Standards8. The result will be Disposable Income (Available Income). 5. Multiple the Disposable Income (DI)9 by 60. ($........ X 60 = $......). (i) If the DI is above $ 11,725 you will not pass the test and you are required to file the bankruptcy under chapter.13 (i.e. anyone earning above median income and with at least $195.42 per month of available income/disposable income (DI)) (ii)If the DI is less than $7,025 you may be able to file bankruptcy under chapter 7. (i.e. less than the $117.08 per month) (iii) If the result is between $ 7,025 and $11,725, compare it with the 25% of your debt (i.e. if the available income is between $117.08 and $195.42 per month) For example: Your income is above median and your debt is $70,000 and you only have $150 as the available monthly income (DI). To arrive at 25% of the debt ($70,000 ÷ 4 = $17,500), you have to multiple $150 by 60, the total amount would be $9,000 ($150 X 60 = $9,000). Since the $9,000 is below the 25% of the debt, you will pass the test and you can file bankruptcy under chapter 7 (iv) if above 25% you will be required to file bankruptcy under chapter 13. NB: There is a significant change in the State Median Income and allowable deductions. If you are filing bankruptcy after November 1, 2010, all the calculations must be in accordance with the new median income and allowable deductions10.

8 9

http://www.justice.gov/ust/eo/bapcpa/20101101/meanstesting.htm DI- Disposable income is the money left over after taxes and fixed costs such as rent/mortgage, food, car payments, insurance, etc. Also called as the available income or any income available for spending and saving. 10 http://www.justice.gov/ust/eo/bapcpa/20101101/meanstesting.htm

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.