The Bankruptcy Means Test Could Affect Your Bankruptcy Case
Filing bankruptcy may not be something you want to do, but it can be a helpful way to get back on track financially. Having the right to file is very valuable when you end up in a bad financial situation.
By filing bankruptcy, you show that you are willing to take responsibility and try to fix what went wrong. It is actually a very smart move to make when you’ve exhausted other options.
When you file for bankruptcy you can choose between Chapter 7 and Chapter 13. Chapter 13 bankruptcy requires creating a repayment plan where you must repay some or all of your debts. With Chapter 7 bankruptcy, the court liquidates or sells off your assets to repay your debts. In both cases, the court dismisses any remaining debt not paid for through the bankruptcy process.
Chapter 13 can help you to retain your assets, but it is a much longer process because you have to take three to five years to work your repayment plan before you get a discharge. Because of this, many people prefer to file Chapter 7. However, to file Chapter 7, you have to pass a means test.
You should hire an attorney to assist you with filing bankruptcy because the process can be confusing. Your attorney can also help guide you through the means test.
Origins and Importance of the Bankruptcy Means Test
Congress put the means test in place as part of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005. The goal was to reduce the number of people filing Chapter 7, specifically preventing wealthier individuals from using this type of bankruptcy over Chapter 13.
The means test also helps creditors because, in Chapter 7, the amount of debt dismissed without payment is often high. If you file Chapter 13, the creditors have a better chance of getting some repayment.
Filing Chapter 7 when you can afford to file Chapter 13 could be bankruptcy abuse, so Congress wanted to put a stop to it. The means test is only applicable for personal debt, though. Business debt does not require passing this test.
How the Bankruptcy Means Test Works
The means test has two parts. It considers your income, expenses and family size. The goal of the test is to see if you have enough disposable income to repay your debts because if you do, then you should file Chapter 13.
Part one of the bankruptcy means test determines if your income is too low. You need to file Form 122A-1 for this part, which will list your income sources. You will provide income information based on the last six months. The court will also allow you to factor in significant changes that would impact your future income.
If your income falls below the median for your state, then you automatically pass the test. If it does not fall below, then you must move to part two of the test.
Part two of the bankruptcy means test considers your expenses in relation to your income. You will use Form 122A-2 for this. It is very easy to make a mistake on this portion of the test. You may be unaware of or forget to include eligible expenses.
Figuring out which expenses qualify and how much to include for each is incredibly challenging. Some expenses you may not think of are out-of-pocket medical expenses or those that you incur from assisting an elderly family member. You may also be able to claim excessive home energy costs and tuition for special needs students.
In addition, you must follow the allowable national and local standards for certain expenses. What this means is that you may not be able to claim the actual full amount you pay for certain things, such as food or housing. You can only claim as much as is allowable. Keep in mind that the law only allows you to claim reasonable and necessary expenses.
You will pass this part of the test if you meet the set limits for disposable income. These low limits show that you do not make enough money for a Chapter 13 repayment plan to work. Thus, you get the right to file Chapter 7. If you do not pass this part of the test, then you cannot file Chapter 7.
Bankruptcy Means Test Exemptions
For the most part, everyone who files bankruptcy must take the means test. However, you may be exempt if you are a member of the military and meet specific requirements:
- You are a disabled veteran with debt incurred while on active duty.
- You are a military reservist or national guard member called to active duty before filing case.
Securing Legal Assistance
Because of the complex nature of bankruptcy and the associated laws, you need someone with legal knowledge to assist with your case. Your attorney can help you to ensure you include all income and expenses so that your means test is accurate.
If you were to make a mistake and pass the means test but later find you should not have passed it, you could face serious issues with your bankruptcy. Depending on where you are in the process, you may have to convert it to a Chapter 13 case, or the court may dismiss your case without discharging your debts.
If you do fail the means test, your attorney can assist you with the next steps to take. He or she can help you file Chapter 13 or offer suggestions on other options you have.
In general, your attorney will be there to move you forward and ensure that you find an adequate solution. It is very difficult to try to navigate this area of law without the help of someone who has knowledge, experience and training in it by your side.
Work With an Experienced Local Lawyer
Because of the rules about bankruptcy, you need to ensure that you do it right the first time. Any mistake could leave you in bigger financial trouble than you started with, so it is wise to seek legal help right from the beginning. Submit a request online or call us today at (866) 345-6784 to get in touch with an experienced lawyer in your area!