Dothan Bankruptcy Attorneys with expertise in “means test” calculations

In 2005, the bankruptcy code underwent extensive amendments, one of which was the creation of a brand-new “means test” to determine the eligibility of debtors to file for Chapter 7 liquidation bankruptcy. The means test was adopted in response to perceived abuse of the bankruptcy system; specifically in the context of filers who were truly able to pay their debts but nevertheless were able to secure a complete discharge of their obligations. Thus, Congress created a two-part test to determine whether a debtor is eligible for Chapter 7 protection; first by comparing the debtor’s income to the median income of similarly situated debtors in that state, and second by calculating the debtor’s “surplus” – the disposable income left after expenses with which the debtor can use to pay down his or her debts. In the event the debtor fails the means test, then he or she is ineligible for Chapter 7 protection.  The debtor would still be eligible for a Chapter 13 reorganization, in which the debtor is subjected to 3-5 year debt repayment plan under the supervision of the bankruptcy trustee. The idea is that when a debtor has sufficient income by which to pay a substantial portion of his or her debts, it is fairer to the creditors than a complete liquidation and discharge.

The first part of the means test comprises a threshold determination. If the debtor’s current monthly income is less than the median state income of similarly situated households, then the debtor is automatically eligible for Chapter 7 without further inquiry. However, if the debtor “fails” the first prong of the means test; that is, his monthly income exceeds the state median, then the second prong of the means test comes into play.

Under the second prong, we calculate the disposable (i.e. leftover) income a debtor has after subtracting our “allowed” expenses such as housing, transportation costs, and other necessities expenses. The maximum allowable disposable income amounts vary state to state, but they are looked at to determine whether there is enough to pay a specified percentage of the debtor’s unsecured debts (for example, credit card bills). If the surplus income is not sufficient to pay this specified percentage, then he passes (or “busts”) the means test and is therefore eligible to file for Chapter 7 liquidation. Conversely, if the debtor has enough disposable income to pay this statutory percentage of unsecured debts, he fails the means test and is not allowed to proceed under Chapter 7. He will still be eligible for a Chapter 13 repayment plan.

The median standards in Alabama can be found at the following website: https://www.justice.gov/ust/eo/bapcpa/20190501/bci_data/median_income_table.htm

If you have found yourself behind on your bill payments and want to know more about your debt relief options, call the expert Dothan bankruptcy attorneys at Boles Holmes White today at 334-366-6086, or email us for a consultation. We have the tools and expertise to secure the best possible result for your unique situation, so let us put our experience to work for you.