Meeting the "Means Test"

If you've considered filing bankruptcy anytime in the last few years, you've probably heard of "the means test- as a new requirement for Chapter 7 bankruptcy. This test is a major part of the 2005 "Bankruptcy Abuse Prevention and Consumer Protection Act.- The credit card companies fought long and hard for the restrictions contained in this Act, spending ten years and millions of dollars convincing Congress the law was necessary to curb perceived "abuse- of the bankruptcy process. The good news is, despite the efforts of the credit card companies to exclude millions from qualifying for Chapter 7 protection, it remains available to many, if not most, of the people who would have qualified under the old law. There's just more red tape now.

So what is the "means test- anyway? Well, the test uses a set of objective factors to assess your ability to pay the unsecured debts that would otherwise be discharged in a Chapter 7 bankruptcy. The reliability of these factors in determining a person's actual ability to pay is up for serious debate.

First, if your income is less than the median income for families of your size in your state and county, you're in. This is the easiest way to qualify; it's just a question of whether your income falls below this figure. You lawyer will have the median income figures for your county. The real task is figuring out what your "income- is under the law. This is your gross monthly pay over the last six months before you filed bankruptcy. You must include income your spouse earned during this period too -“ even if you and your spouse did not file a joint petition -“ unless you're legally separated. Also note that you need not include social security derived pay as part of your income.

If, like many people, you don't qualify under this test, don't despair. You just have to dig a little deeper. Instead of just looking at your gross income, you have to compare that against your expenses over the same period. Your housing and living expenses are based upon a set of pre-determined figures that are supposed to accurately reflect the expenses of most people with your gross income living in a family of your size -- again a subject ripe for debate. You can also include other necessary expenses, such as taxes, payroll deductions and child care expenses. The result of this calculation is your disposable income -“ how much money you have after the bills are paid. So long as this figure doesn't exceed a certain amount -“ $100 in most cases -“ you pass the means test.

The third way to satisfy the test is to qualify for an exception to it. Even if you don't pass the test, the court can accept your Chapter 7 petition if you can show "special circumstances- make it impossible for you to qualify. For example, maybe your income was fairly high for most of the past six months, but then it was suddenly cut off or reduced because you lost your job or became disabled in an accident.

So, what's the upshot? Yes, now you need to jump through more hoops to file a Chapter 7. But, chances are, if you're struggling with unmanageable debts, you can satisfy the means test. And, even if you can't, you can still qualify for Chapter 13 bankruptcy. Call a Raleigh bankruptcy attorney today to see what the new law can do for you.