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