Since the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (“BAPCPA”), some clients seeking relief from debts under the Bankruptcy Code are subject to a “means test.” The purpose of the “means test” was to make it more difficult for people with primarily consumer debts to qualify for relief under Chapter 7 of the Bankruptcy Code if they had a level of income that Congress felt should enable them to pay back some portion of their debts.
The means test is only applied to debtors whose “Current Monthly Income” (“CMI,” a term that is defined, with mind-numbing complexity, by BAPCPA) exceeds the median income for households of the same size in that state, using a look-back period of six months. If the debtor’s CMI is less than the state’s median income for that size household, then the means test is not applicable. This is important because qualifying for Chapter 7 without means testing makes a bankruptcy case substantially easier to file and complete.
So, for instance, assume a North Carolina husband and wife with two children living at home have encountered a financial setback and conclude they need relief under Chapter 7. Assume further that husband and wife are both employed and earn roughly $60,000 per year. The newly-released statistics from the Census Bureau tell us that the median income for families of four in North Carolina is about $67,500. Therefore, our hypothetical family’s income falls below that amount and means testing is not applicable. They can file a Chapter 7 case without further analysis.
If, on the other hand, their household income was, say, $75,000, they still might qualify for relief under Chapter 7…but they are subject to the means test first. The means test is applied by calculating the debtor’s “current monthly income” and then reducing it by the amount of certain deductions prescribed by the IRS. These “presumed expenses” could be more, less, or the same as our family’s actual monthly living expenses. If that comparison shows that our family has certain amounts of money “left over” to apply to their debts, they would have to file under Chapter 13 and make monthly payments to a Trustee toward those debts. If not, then they would still be allowed to file a Chapter 7 case and get the debts discharged in full, immediately.
If you or someone you know has run into financial trouble and are considering bankruptcy, call our firm for a free consultation, or go to www.defendmyrightsnow.com/bankruptcy.html to learn more.
- Wikipedia’s Bankruptcy page (http://en.wikipedia.org/wiki/Bankruptcy)
- Median Income figures are published every six months. The current figures were just released and are applicable for cases filed on or after November 1, 2009. They can be found at: http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm