Bankruptcy Means Test: Income Eligibility, Bankruptcy Qualification

This comprehensive guide explains the Bankruptcy Means Test, detailing income eligibility, disposable income calculations, and implications for Chapter 7 bankruptcy qualification, ensuring individuals understand the process and criteria for debt relief.

Introduction

The Bankruptcy Means Test is a critical component in determining eligibility for filing Chapter 7 bankruptcy in the United States. This test assesses whether an individual's income is low enough to qualify for Chapter 7 bankruptcy, which allows for the discharge of most unsecured debts. This guide provides a comprehensive overview of the Bankruptcy Means Test, including income eligibility criteria, the calculation process, and the implications of the test results.

What is the Bankruptcy Means Test?

The Bankruptcy Means Test was introduced as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. Its primary purpose is to prevent abuse of the bankruptcy system by ensuring that only individuals who genuinely cannot repay their debts qualify for Chapter 7 bankruptcy. The test compares an individual's income to the median income of their state and evaluates their disposable income to determine eligibility.

The Bankruptcy Means Test is codified in 11 U.S.C. § 707(b)(2). This section of the U.S. Bankruptcy Code outlines the criteria and procedures for conducting the means test. The full text of the statute can be accessed here.

Income Eligibility Criteria

Median Income Comparison

The first step in the Bankruptcy Means Test is to compare the debtor's current monthly income (CMI) to the median income for a household of the same size in their state. The median income figures are updated periodically by the U.S. Census Bureau and can be found on the U.S. Trustee Program's website.

Current Monthly Income (CMI)

CMI is calculated by averaging the debtor's monthly income over the six months preceding the bankruptcy filing. This includes all sources of income, such as wages, salaries, bonuses, and other forms of compensation. Certain types of income, such as Social Security benefits, are excluded from this calculation.

Above or Below Median Income

  • Below Median Income: If the debtor's CMI is below the median income for their state, they automatically qualify for Chapter 7 bankruptcy.
  • Above Median Income: If the debtor's CMI is above the median income, they must proceed to the second part of the means test, which involves calculating their disposable income.

Calculating Disposable Income

Disposable income is determined by subtracting allowable expenses from the debtor's CMI. The allowable expenses are based on national and local standards set by the Internal Revenue Service (IRS) and include categories such as housing, utilities, transportation, and food.

Allowable Expenses

The IRS standards for allowable expenses can be accessed here.

National Standards

  • Food, Clothing, and Other Items: These expenses are based on the number of people in the household and are standardized across the country.
  • Out-of-Pocket Health Care: This includes medical expenses not covered by insurance.

Local Standards

  • Housing and Utilities: These expenses vary by county and metropolitan area.
  • Transportation: This includes vehicle ownership costs and public transportation expenses.

Additional Deductions

Certain additional deductions may be allowed, such as:

  • Secured Debt Payments: Mortgage or car loan payments.
  • Priority Debt Payments: Child support or tax obligations.
  • Necessary Expenses: Expenses necessary for the health and welfare of the debtor and their dependents.

Means Test Calculation

The means test calculation involves several steps:

  1. Determine CMI: Calculate the debtor's average monthly income over the past six months.
  2. Compare to Median Income: Compare the CMI to the median income for the debtor's state and household size.
  3. Calculate Disposable Income: Subtract allowable expenses from the CMI to determine disposable income.

Passing the Means Test

  • Pass: If the debtor's disposable income is below a certain threshold, they pass the means test and qualify for Chapter 7 bankruptcy.
  • Fail: If the debtor's disposable income is above the threshold, they may not qualify for Chapter 7 and might need to consider Chapter 13 bankruptcy instead.

The official forms for the means test calculation can be found on the U.S. Courts website.

Implications of the Means Test Results

Qualifying for Chapter 7 Bankruptcy

Passing the means test allows the debtor to file for Chapter 7 bankruptcy, which involves liquidating non-exempt assets to repay creditors and discharging most remaining unsecured debts. This process provides a fresh financial start for the debtor.

Failing the Means Test

If the debtor fails the means test, they may still have options:

  • Chapter 13 Bankruptcy: This involves creating a repayment plan to pay off debts over three to five years. The debtor can keep their assets but must adhere to the court-approved repayment plan.
  • Reevaluation: The debtor may seek a reevaluation of their financial situation or explore other debt relief options.

Special Considerations

Military and Veterans

Certain exemptions and special considerations apply to military personnel and veterans. For example, disabled veterans whose debts were incurred primarily during active duty or in support of homeland defense activities may be exempt from the means test. More information can be found in the Veterans' Benefits and Bankruptcy guide.

Recent Changes and Updates

The means test and related income thresholds are subject to periodic updates. It is essential to refer to the most recent guidelines and figures when conducting the means test. The latest updates can be accessed on the U.S. Trustee Program's website.

Conclusion

The Bankruptcy Means Test is a crucial tool in determining eligibility for Chapter 7 bankruptcy. By assessing an individual's income and expenses, the test ensures that only those who genuinely need debt relief can access it. Understanding the means test process, including income eligibility criteria and the calculation of disposable income, is essential for anyone considering bankruptcy. For more detailed information and official resources, refer to the links provided throughout this guide.

References

  1. Chapter 7 - Bankruptcy Basics | United States Courts
  2. Means Testing - U.S. Trustee Program - Department of Justice
  3. Chapter 7 Means Test Calculation | United States Courts
  4. Publication 908 (02/2024), Bankruptcy Tax Guide - IRS
  5. Veterans' Benefits and Bankruptcy - CRS Reports
  6. IRS Collection Financial Standards

This comprehensive guide aims to provide a clear and detailed understanding of the Bankruptcy Means Test, helping individuals navigate the complexities of bankruptcy qualification and income eligibility.

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