The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). BAPCPA requires individual debtors filing for under chapter 7 to pass the "means test" in order to be able to file under chapter 7.  The means test was established to prevent filers with high income from filing for bankruptcy under chapter 7 and receiving a discharge of debts.  The goal of the test is to force debtors that can afford to repay debt to file under chapter 13 and to repay debt under a plan.  

Under the means test, if a debtors income exceeds a certain threshold a presumption arises that the chapter filing is an abuse of the bankruptcy process.  An attorney from our office will help determine your eligibility to file chapter 7 bankruptcy.

How the Means Test Works:
The first step is  is to determine if a debtor's current monthly income is less than the median income for a household of the same size in the state in which the debtor resides.  If the debtors income is less, the debtor may file under chapter 7 and rest of the means test does not have to be completed.

If, however, the debtor's income exceeds the state's median income, then a determination is made to see if the debtor has enough income left over (called "disposable income"), after paying  allowed monthly expenses  to pay off at least a portion of the unsecured debts, such as credit card bills.  If the debtor's disposable income adds up to more than a certain amount, the means test is failed and the debtor can't file under Chapter 7.   An important aspect of the test is that the figures used by the court to calculate living expenses are NOT the debtor's actual living expenses, but are instead amounts taken from the same schedules used by the IRS in the collection of taxes.

In this second step of the means test,  the debtor's income, less living expenses (excluding payments on the debts included in the bankruptcy), is multiplied by 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations.  If the income available for debt repayment over that 5-year period is $10,000 or more, then Chapter 13 will be required. In other words, with anyone earning above the state median, and with at least $166.67 per month of available income, the presumption of abuse arises and chapter 7 will be denied. 

If the debtor's median income exceeds the state's medium, but the debtor does not have at least $166.67 per month to pay toward your debts, then the final part of the means test is applied.   If the disposable income is less than $100 per month, then Chapter 7 again becomes an option. If the available income is between $100 and $166.66, then it is measured against the debt as a percentage, with 25% being the benchmark.  If the disposable income over five years exceeds 25% of the total debt, 7 the presumption of abuse arises and chapter 7 will be denied. 

There are special circumstances that will rebut (or overcome) the presumption when the presumption arises and those circumstances are best evaluated by an attorney.

If you are considering filing for bankruptcy and don't know if the means test will apply to you, please give us a call and schedule a free consultation. We'll make the determination for you.

Call Buckey and Schurter at 951-278-2224 to consult with an attorney.