One of the biggest, if not the biggest, changes that was made to the Bankruptcy Code in 2005 was the addition of the means test. In a nutshell, the purpose of the means test is two-fold. First, the means test will determine whether or not your income qualifies you for Chapter 7 bankruptcy. Second, if your income is above the Chapter 7 limits, the means test will determine how much your Chapter 13 plan payment will be.
Before we can prepare your petition you’ll need to provide paystubs or other evidence of your gross (before taxes) income for the last six months. We have to include your spouse’s income if you’re living together, whether or not he or she is filing with you. We’ll total that six month income and divide by six to get your monthly average income. Then we multiply your monthly average income by twelve to get your annual income. If your annual income is below the median income (as calculated by the Census Department) for your household size, we can move on to calculating your actual net (after taxes) income and your actual expenses. As long as your actual net income doesn’t exceed your actual expenses by more than roughly $125 – $150, you can file Chapter 7 bankruptcy and have your dischargeable debts wiped out about 90 days after we file your petition.
If your annual income is greater than median income for your household size, we have to go deeper into the means test. The means test permits you to deduct certain allowed expenses from your income. If those deductions bring your income below the median income, we can move on to calculating your actual net income and actual expenses to see if you’re eligible for chapter 7.
However, if your annual income is still above the median income you have to file chapter 13 bankruptcy. We’ll use the means test to find out what your “projected disposable income” (income – expenses = projected disposable income) is. Your projected disposable income is what you’ll pay the chapter 13 trustee each month for your payment plan. The trustee will distribute that money to your creditors who file a claim in your case (after he takes out his cut for administering the case as well as attorney’s fees).
You’ll know what your monthly payment will be before your attorney files your case. That way you’ll know whether chapter 13 is your best option. It’s possible that based on the calculations required by the Bankruptcy Code you’ll have to repay your creditors the entire amount that you owe when you file (lawyers call this a 100% plan). If that’s the case, bankruptcy might not make sense.
The means test is arguably the most challenging element in preparing a bankruptcy petition. Like a tax return it is filled with pitfalls and you should consider consulting with an experienced lawyer to help you through the process. It may make the difference between filing chapter 7 or chapter 13 bankruptcy, saving you money and getting your debts wiped out years sooner.
If you have questions about the means test and are wondering whether bankruptcy is a good option for you, we hope you’ll come in for a free, no-obligation consultation with an experienced bankruptcy attorney. You can make an appointment with our online scheduling system or call 303.331.3403 to set up a time that’s convenient for you.