The Bankruptcy Code was significantly amended with a general effective date of October 17, 2005. It was Congress’ intent to make those who could afford to pay back a portion of their debt ineligible to eliminate their debt in a Chapter 7 bankruptcy. This intent is being carried out by the advent of the “means test.” This test can be invoked by any creditor, the trustee, the court or the U.S. Trustee.
Under the new law, a large snapshot is taken to determine if the debtor has the means to pay back his debts. It involves complicated mathematical equation that begins with the debtor’s current monthly income (CMI). If the debtor’s CMI is less than the state median income, the debtor can file a Chapter 7 and no further calculations are required.
Intricate Details of the Means Test
Current monthly income is not determined by the income made during the current or previous month. While that seems contradictory, please keep reading. The actual CMI is the average monthly income received by the debtor (and the debtor’s spouse in a joint case) during the six month period prior to the petition date. This calculation effectively prevents a debtor who is out of work for one month from claiming that he cannot pay back his debt. He may in fact have a high (CMI) if his income from the prior five months was great.
If the debtor’s CMI is greater then the state median income, then you must continue to calculate in accordance with the means test formula to determine if the debtor can file a Chapter 7 or not.
If the debtor’s CMI minus allowable deductions is less than $100 per month, then the debtor can file for bankruptcy under Chapter 7. If the debtor’s CMI minus allowable deductions is greater than $166, then the debtor must file a Chapter 13 bankruptcy. If the debtor’s CMI less allowable deductions is between $100 and $166, then he may need to file under Chapter 13 depending upon the amount of unsecured debt and the percentage that could be repaid using the debtor’s disposable income over a five year period.
If the disposable income amount is not enough to pay 25% to unsecured creditors over a five year period, the debtor can file a Chapter 7.
Bottom line: the amount of debt is a factor in determining whether the debtor must file a Chapter 13. The greater the debt, the more likely that the debtor will be able to file a Chapter 7.
Defining “Disposable Income”
Disposable income is now based upon expense standards provided by the Internal Revenue Service as they relate to the local area in which the debtor lives. A debtor’s true expenses do not matter.
If the debtor has disposable income of $167.00 per month, he will always fail the means test, regardless of how much unsecured debt the debtor may have. Additionally, the Chapter 13 plan will have to be for five years, not three years.
The presumption of abuse or failing the means test can always be rebutted. The debtor will have to demonstrate special circumstances that would decrease the income or increase the expenses, so that the debtor actually qualifies for Chapter 7.
For example, the debtor may have constant medical expenses which are beyond the limits of IRS guidelines. That debtor may be able to rebut the presumption of abuse under the new means test.
Please contact an experienced bankruptcy attorney to determine the likelihood that you will qualify for Chapter 7 bankruptcy relief.