What is the Bankruptcy Means Test?

Since October 2005, the new Means Test for bankruptcy enforced by the federal government has created a stir of questions and confusion among applicants that seek to file bankruptcy under a stipulated chapter. The means test is utilized by judicial courts to determine the eligibility requirement for applying under Chapter 7 & 13 of bankruptcy.

When most individuals consider the thought of declaring bankruptcy, they consider Chapter 7. This is where unsecured arrears are generally discharged as a whole. Stating bankruptcy under any circumstance is a difficult tribulation; however, with the Chapter 7 exemptions, it becomes more feasible as the debtor is able to wipe a clean slate and gain a fresh start with their finances. Contrastingly, Chapter 13 is a total new policy where the debtor needs to make paybacks of a significant amount that will cover a portion of the debt within three to five years.

To apply for the means test, a judicial court will review the debtor’s average income for five to six months and compare it to the median state income levels. If the average median of income is below the stated income level, then individuals can opt for the Chapter 7 right to file for bankruptcy. If the median is beyond the average income levels, then the applicant is expected to undertake the means test. Here is where the task gets a little complicated. The means test includes a step of calculation where income is excluded from the debts that are included within bankruptcy. This is then multiplied by a certain figure that averages 60 for a five year plan for repayment of these obligations. In totality, individuals need to first figure out whether they are above or below the median average of income that is stated by the state government. A larger issue that individuals face is adjusting their household budget when preparing a report for their medians.

To sum up, first figure out whether you are above or below the median income for your state - median income figures are available at http://www.new-bankruptcy-law-info.com. Be sure to account for your spouse's income if you are a two-income family. Next, deduct your average monthly living expenses from your monthly income and multiply by 60. If the result is above $10,000, you're stuck with Chapter 13. If the result is below $6,000, you may still be able to file Chapter 7. If the result is between $6,000 and $10,000, compare it to 25% of your debt. Above 25%, you're looking at Chapter 13 for sure. Most of these budgets do not gain the approval of the IRS and their approved figures. At few instances the state judicial court may rule out these expenses as not part of the median. It is essential that all applicants understand the new rules for the bankruptcy means test so as to gain the best possible benefit.