Means Test

The Means Test – What Is It?

Dothan Bankruptcy Attorneys with expertise in “means test” calculations

As you might have heard in the news, the bankruptcy code underwent extensive amendments in 2005, 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, although the case may be converted to 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 more fair to the creditors than a complete liquidation and discharge, under which the creditors typically receive only “ten cents on the dollar” of what they were originally owed.

There are a few problems with these revisions to the bankruptcy code – first, studies show that the perceived bankruptcy abuse was actually much less of a problem than originally thought; indeed, a very low percentage of people considering bankruptcy fail the means test, since most are in dire need of the bankruptcy codes’ protections. Second, the means test adds an unnecessarily complex calculation to the process, costing time and money to both the filers and the court system. Thus, while the test makes it harder for people in need of debt relief to file for Chapter 7 bankruptcy, in practice it has failed to produce any substantial reduction in abuse of the system.

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 basic 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. His case may still be eligible for transfer to a Chapter 13 repayment plan.

The median standards in Alabama, effective April 1, 2013, are:

Persons in Household Monthly Annual
1 $3,343 $40,120
2 $4,097 $49, 163
3 $4,351 $52, 215
4 $5, 392 $64,700
5 $6,067 $72,800
6 $6, 742 $80,900
7 $7,417 $89,900
8 $8,092 $97,100
9 $8, 767 $105,200
10 $9,442 $113,300

Often ineffective and certainly costly, the means test has been lambasted by bankruptcy attorneys across the nation. It prevents a lot of otherwise eligible persons from obtaining Chapter 7 protection, but statistics indicate that it has resulted in a minimal increase in instances of bankruptcy abuse.  In any event, you need an experienced debt relief attorney to help ensure you can “bust” the means test and ensure Chapter 7 eligibility. 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 Parkman White, LLP today at 334-792-1900, 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.