The New Bankruptcy Law in 2005 (the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or “BAPCPA”) added a new “qualification” standard for Chapter 7 called the “Means Test.” We’ll explain the Means Test below. Before BAPCPA, it was very rare for a Chapter 7 case to be dismissed because of a finding of “abuse” of the Bankruptcy laws. These earlier findings of abuse tended to happen where a debtor had very high income and could easily afford to pay back some debts over time, but instead chose to file Chapter 7 and discharge the debts. Again, it was rare and the Courts seemed to take action when there were very clear cases of this so-called abuse of the law.
But BAPCPA now requires every Chapter 7 debtor to qualify under the Means Test and there is a very complicated formula that can cause confusion and dismay for people facing bankruptcy. Hopefully, we can simplify the Means Test for you and show you how it may or may not apply to you.
We offer a free Means Test as part of your FREE CONSULTATION when you meet with us. So if you have any concerns about this issue, please call us at 1(800) 551-7922 and let us put your mind at ease.
You should note, however, that if you have rising income or income that has gone up or may go up quickly, you may still have a chance to file Chapter 7 if you call us right away. As you’ll see below, the method used to determine your income is not an annual test, but rather, it looks backwards at your last six months of income. So you may still be entitled to relief in Chapter 7. Don’t wait, call us.
The rules for the Means Test are contained in the Bankruptcy Code at Section 707(b). The Means Test requires us to first determine if your income is above or below the “Median Income” level for similar households in your state. The United States Department of Justice website has the actual tables where you can find your state and match your household size and type. The figures used are based on Census Bureau statistics.
In California, including San Diego, the Median Income level for a 4-person household with a single income earner is $76,211 for cases filed after May 1, 2014, and $48,498 for a single person. These numbers change over time, of course, so you’ll have to check the variables that may apply to you and check the latest tables and data.
The Means Test requires that we look at the income “derived” during the 6 month period before you file your bankruptcy petition. All of your income must be included in your calculations except for (1) payments you received under the Social Security Act (including Social Security Retirement, SSI, SSDI, and TANF); (2) payments to victims of war crimes or crimes against humanity; and (3) payments to victims of international or domestic terrorism.
Another income consideration for some people is “irregular income,” when your income varies widely over time. This can happen to people that earn commission income or people that receive large bonuses. You will need to consult with us because the Courts have different ways to look at your income depending on how your income is “derived”; and we will be able to guide you through any difficult issues and provide you with solutions.
If your income is BELOW the Median Income that applies to your situation, you are generally safe and you will not have to further qualify under the new Means Test. But if your income is ABOVE the Median Income for your situation, you will have to go a little further into the Test to see if you are excluded from Chapter 7.
Please note that the Bankruptcy Code does give the Court the power to separately exclude you from Chapter 7 if it believes that your case was filed in “bad faith” for other reasons. We will look at all of your circumstances, not just the Means Test, and tell you if there is any risk of dismissal under separate standards associated with your case.
If your income is above the Median Income level for your household size and type, you will be subjected to the next part of the Means Test—a complex formula that is based in part on hypothetical living expenses. But the formula is also based on some of your actual living expenses. To some people, this makes the test seem arbitrary and unfair.
If your income is high enough to be subjected to the “Projected Disposable Income” portion of the test, then we will apply your allowed actual expenses and the hypothetical expenses that we are required to use. The Means Test uses certain expense standards for these expenses that are also used by the IRS to determine the size of monthly payments that it will collect from delinquent tax payers. To see this in detail, go to the U.S. Department of Justice website to find the national and local expense standards that apply in your case.
After this calculation of your “projected disposable income”, if you have “excess income” on a monthly basis, then the Means Test looks at the amount of the excess to determine if there is enough excess to justify a payment plan to creditors. The calculations require that we take your calculated excess monthly income and multiply that number by 60 (since a payment plan in Chapter 13 could extend for 60 months). So you end up with a dollar figure that represents your “60-month disposable income.”
If your “60-month disposable income” is LESS THAN $7,475, then you pass the Means Test and you qualify for Chapter 7. If this 60-month amount is GREATER THAN $12,475, then you have failed the Means Test. And if this 60-month amount is BETWEEN $7,475 and $12,475, then you need to do another calculation.
So if you are in between these two excess income amounts, the next step is to compare your excess income amount to your “unsecured debts” (credit cards, open accounts, basically most debts other than your mortgage and car loans which are secured by liens). If the excess income is enough to pay MORE THAN 25% of your unsecured debts, then you fail the Means Test and you won’t qualify for Chapter 7. But if these numbers say that you won’t be able to pay more than 25% of your unsecured debts, you pass!
Even if you fail the Means Test, it may still be possible for you to file Chapter 7 if you can show “special circumstances.” The Bankruptcy Code defines the term “special circumstances” to be “a serious medical condition or a call to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.”
This is why we assess the entirety of your circumstances when we do the Means Test for you. If we think a special circumstances exception may apply to your case, the law requires that we present documentation along with a detailed explanation. This explanation and your documentation must demonstrate that your special circumstances will create significant extra expenses or an adjustment of your income that is necessary and reasonable.
Find out if Chapter 7 bankruptcy will work for you in light of your income under the Means Test. Find out about your other options too. Call the Bankruptcy Law Center today to set up a FREE consultation at 1-(800)-551-7922.