What is the “Means Test” and Why Does it Matter in Bankruptcy?

The “Means Test” was one of the major and most controversial additions to consumer bankruptcy law that occurred as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Part of the congressional intent of BAPCPA was to limit a person’s ability to obtain Chapter 7 relief and instead direct them into filing Chapter 13. While there are many reasons why some consumer debtors actually prefer to file Chapter 13 bankruptcy, Chapter 7 is still widely available and common, only now with a few additional hurdles to pass.

These “hurdles” to qualify to Chapter 7 that were added in 2005 as part of BAPCPA are collectively referred to as the “Means Test”. In actuality, the Means Test is an 8-page calculation that determines one’s eligibility for Chapter 7 using criteria such as the debtor’s income (as based on the last six months), household size, expenses and any special circumstances that may justify relief under Chapter 7 bankruptcy. While many of the numbers used are drawn from IRS standard allowances for food, utilities, and similar routine expenses, a person’s actual payments made monthly on secured debts such as mortgages and car loans are included to reduce their income. Generally speaking, if a person has no disposable income remaining at the end of the month after payment of all these standard and actual expenses, they may qualify for Chapter 7.

However, if when the last six months of income is annualized (i.e., doubled) and the person falls above the median income for their household size and state, they are instead steered toward filing Chapter 13, which includes a monthly repayment plan. As of 11/01/2015, the median income in Minnesota for a household of one person is $51,199, for two people $68,515, for three people $80,804, and $98,447 for four people. The median income adjusts at least once per year and these amounts reflect the median income as last adjusted on November 1, 2015 which will again be adjusted in April of 2016.

Even if someone is above the median income for Minnesota, they may still qualify for Chapter 7 (also referred to as “passing the Means Test”) based on other circumstances.

One job of your bankruptcy attorney is to give you all your bankruptcy and non-bankruptcy options, including calculating the Means Test for you and advising you on whether you qualify for Chapter 7 or if you may want or need to file Chapter 13 instead.

Wartchow Law Office is a law firm located in Edina, Minnesota with an exclusive practice in Chapter 7, Chapter 13 and Chapter 11 bankruptcy law, representing individual consumer and business clients throughout the Twin Cities of Minneapolis and St. Paul, Minnesota.

 

While Bankruptcy Are Filings Down, Debts Are Still Up—Get Practical Bankruptcy Advice Sooner Rather than Later

According to the National Association of Consumer Bankruptcy Attorneys, the number of people filing for bankruptcy in 2011 has dropped as much as 30% in some states from 2010 to 2011. It speculates that the reason for the decline in bankruptcy filings may be due to the costs associated with filing bankruptcy, rather than an indication that people’s debts are becoming more manageable. In Minnesota, the court filing fee for Chapter 7 is $299 and the attorney fees in a typical Chapter 7 case can average $2,000 or more for a simple case. While bankruptcy attorneys should be especially busy in a downturned economy, their clients are scrambling to make mortgage payments and keep up with routine living expenses on less and less income, thus leaving little funds available for the expense of actually getting long term debt relief in bankruptcy.

However, the irony that bankruptcy is expensive shouldn’t prevent people from understanding the ramifications of debt and getting educated on their bankruptcy and non-bankruptcy options. Most bankruptcy attorneys offer free, no commitment consultations where they will review your circumstances and give you guidance and advice on how much bankruptcy will cost and how long it will take. The last thing most people want is to find themselves in the midst of a foreclosure, lawsuit or facing a wage garnishment and not having known there were options available to them to avoid that sticky situation, including filing for bankruptcy and sometimes options that don’t even involve bankruptcy. It never hurts to educate yourself especially if the only cost is a couple hours of your time.

Debts don’t go away fast, as we all know. Bankruptcy is your constitutional right to  relief from struggling under debt. Find out what bankruptcy can do for you and then decide if it makes sense.

Wartchow Law Office represents consumer and business bankruptcy clients in Chapter 7, Chapter 13 and Chapter 11 business reorganizations.