| With the new bankruptcy law in effect as of | | | | |
| October 17, 2005, there is a lot of confusion | | | | What happens if you are above the median |
| with regard to the new "means test" | | | | income but do NOT have at least $166.67 per |
| requirement. The means test will be used by | | | | month to pay toward your debts? Then the |
| the courts to determine eligibility for | | | | final part of the means test is applied. If |
| Chapter 7 or Chapter 13 bankruptcy. The | | | | the available income is less than $100 per |
| purpose of this article is to explain in | | | | month, then Chapter 7 again becomes an |
| plain language how the means test works, so | | | | option. If the available income is between |
| that consumers can get a better idea of how | | | | $100 and $166.66, then it is measured against |
| they will be affected under the new rules. | | | | the debt as a percentage, with 25% being the |
| | | | benchmark. |
| When most people think of bankruptcy, they | | | | |
| think in terms of Chapter 7, where the | | | | In other words, let's say your income is |
| unsecured debts are normally discharged in | | | | above the median, your debt is $50,000, and |
| full. Bankruptcy of any variety is a | | | | you only have $125 of available monthly |
| difficult ordeal at best, but at least with | | | | income. We take $125 times 60 months (5 |
| Chapter 7, a debtor can wipe out the debts in | | | | years), which equals $7,500 total. Since |
| full and get a fresh start. Chapter 13, | | | | $7,500 is less than 25% of your $50,000 debt, |
| however, is another story, since the debtor | | | | Chapter 7 is still a possible option for you. |
| must pay back a significant portion of the | | | | If your debt was only $25,000, then your |
| debt over a 3-5 year period, with 5 years | | | | $7,500 of available income would exceed 25% |
| being the standard under the new law. | | | | of your debt and you would be required to |
| | | | file under Chapter 13. |
| Prior to the advent of the "Bankruptcy Abuse | | | | |
| Prevention and Consumer Protection Act of | | | | To sum up, first figure out whether you are |
| 2005," the most common reason for someone to | | | | above or below the median income for your |
| file under Chapter 13 was to avoid the loss | | | | state (median income figures are available at |
| of equity in their home or other property. | | | | Be sure to account for your spouse's income |
| And while equity protection will continue to | | | | if you are a two-income family. Next, deduct |
| be a big reason for people to choose Chapter | | | | your average monthly living expenses from |
| 13 over Chapter 7, the new rules will force | | | | your monthly income and multiply by 60. If |
| many people to file under Chapter 13 even if | | | | the result is above $10,000, you're stuck |
| they have NO equity. That's because the means | | | | with Chapter 13. If the result is below |
| test will take into account the debtor's | | | | $6,000, you may still be able to file Chapter |
| income level. | | | | 7. If the result is between $6,000 and |
| | | | $10,000, compare it to 25% of your debt. |
| To apply the means test, the courts will look | | | | Above 25%, you're looking at Chapter 13 for |
| at the debtor's average income for the 6 | | | | sure. |
| months prior to filing and compare it to the | | | | |
| median income for that state. For example, | | | | Now, in these examples, I have ignored a very |
| the median annual income for a single | | | | important aspect of the new bankruptcy law. |
| wage-earner in California is $42,012. If the | | | | As stated above, the amount of monthly income |
| income is below the median, then Chapter 7 | | | | available toward debt repayment is determined |
| remains open as an option. If the income | | | | by subtracting living expenses from income. |
| exceeds the median, the remaining parts of | | | | However, the figures used by the court for |
| the means test will be applied. | | | | living expenses are NOT your actual |
| | | | documented living expenses, but rather the |
| This is where it gets a little bit trickier. | | | | schedules used by the IRS in the collection |
| The next step in the calculation takes income | | | | of taxes. A big problem here for most |
| less living expenses (excluding payments on | | | | consumers is that their household budgets |
| the debts included in the bankruptcy), and | | | | will not reflect the harsh reality of the IRS |
| multiplies that figure times 60. This | | | | approved numbers. So even if you think you |
| represents the amount of income available | | | | are "safe," and will be able to file Chapter |
| over a 5-year period for repayment of the | | | | 7 because you don't have $100 per month to |
| debt obligations. | | | | spare, the court may rule otherwise and still |
| | | | force you into Chapter 13. Some of your |
| If the income available for debt repayment | | | | actual expenses may be disallowed. What |
| over that 5-year period is $10,000 or more, | | | | remains to be seen is how the courts will |
| then Chapter 13 will be required. In other | | | | handle cases where the cost of mortgages or |
| words, anyone earning above the state median, | | | | home rentals are inflated well above the |
| and with at least $166.67 per month of | | | | government schedules. Will debtors be |
| available income, will automatically be | | | | expected to move into cheaper housing to meet |
| denied Chapter 7. So for example, if the | | | | the court's required schedule for living |
| court determines that you have $200 per month | | | | expenses? No one has any answers to these |
| income above living expenses, $200 times 60 | | | | questions yet. It will be up to the courts to |
| is $12,000. Since $12,000 is above $10,000, | | | | interpret the new law in practice as cases |
| you're stuck with Chapter 13. | | | | proceed through the system. |