There are several factors that your local bankruptcy attorney will consider when discussing the filing of a bankruptcy case. These factors include your income, expenses, the types of debt you have, and the value of the assets that you own. These and other factors go into how you perform on something called The Means Test.
In 2005 Congress decided that the bankruptcy laws needed to be changed so that people with high incomes will be required to repay debts through a Chapter 13 bankruptcy rather than just wiping out debts in a Chapter 7. A new law was passed called the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). One of the requirements that Congress approved was that each person filing bankruptcy must first pass a test called The Means Test.
The Means Test is a complicated calculation which has two steps. The first step of the Means Test calculates your gross income. Gross income is the amount of your wages before any payroll deductions are taken. You must provide paystubs for the six months prior to the month of the filing of the case so that an average monthly income can be calculated for the last six months. This average monthly income figure is then multiplied by twelve to get a gross annual income based on those six months. Your attorney will then look at a chart which lists the median (average) household income for a household of your size in the state which you reside. If your gross annual income is below the median household income, you pass the means test and no further calculation is required. However, if your annual income is above the median household income, you fail step one of the Means Test and must move to the second step of the calculation.
The second step of the Mean Test is basically a budget. The purpose of deducting expenses from your gross income is to calculate your net income. Net income is the amount of your wages after all allowed deductions are subtracted. There are three categories of expenses. The first category are expenses which are fixed using IRS standards, such as food and clothing. The second category are expenses which you actually pay, such as payroll taxes, insurance, and medical expenses. The final category of expenses are monthly payments on your secured debts, such as vehicles and house payments. After all three categories of expenses are deducted from your gross annual income, the net income figure is calculated and is called your disposable income. Your bankruptcy lawyer will once again check the chart containing the median household figures. If your disposable income is below the median household number on the chart, you pass the Means Test and can go forward with your case. If your disposable income is above the median household income, you fail the Means Test.
If you fail the Means Test after the second step, you have to reconsider your options on the type of bankruptcy you plan to file. You cannot file a Chapter 7 bankruptcy because BAPCPA does not allow the filing of a Chapter 7 if you fail the Means Test. However, your bankruptcy options are not closed to you. You still have the option to file Chapter 13 and reorganize the repayment of your debts. You and your attorney will review the case to see if a Chapter 13 is feasible for your situation.
Failing the Means Test does not affect your ability to file a Chapter 13 bankruptcy. You can file a Chapter 13 even if you fail the means test. The impact of the failure to pass the Means Test on a Chapter 13 is that your disposable net income determines the amount of debt which you must pay to unsecured creditors. Unsecured creditors are those in which there is no collateral for the debt, such as credit cards, medical bills, and payday loans. The disposable income amount to pay unsecured creditors is a fixed amount. Even if that fixed amount does not pay your unsecured debts in full, disposable income amount is all that the judge will order to be paid to those creditors in your case.
The Means Test is a difficult calculation. You should be sure to provide each paystub to your attorney for the six months prior to the estimated filing date of your bankruptcy case because you want the most accurate income figure for the calculation. Sometimes a few dollars can make the difference in passing or failing the first step of the Means Test. You may need to provide proof of some expenses, such as charitable contributions and monthly medical expenses. Your bankruptcy lawyer will review the results of the Means Test with you so that you can make the best decision for your financial situation.