Developed to slow the rate of Chapter 7 bankruptcy filings, the Means Test helps determine whether or not someone qualifies to file Chapter 7, and in a Chapter 13 bankruptcy, to what extent you might be able to pay back some of your creditors. It's become a very frustrating part of the bankruptcy process because it implies, "Hey, you just don't want to pay your bills." Not only that, it also subjects filers to additional frustration, confusion and widens the gap between citizens and the law in place to protect them.
However, there are ways to overcome the restrictions and complications of the Means Test. Of course, this is where the insight of an experienced bankruptcy attorney is especially beneficial, as it can take some time and expert handling.
Called "special circumstances," a judge may grant you permission to file Chapter 7 in spite of failing the Means Test. (Failing, in this context, indicates that you have some ability to pay and that you would have to file under Chapter 13 and pay your monthly disposable income to your unsecured creditors through a Chapter 13 plan.) If you are a member of the Armed Forces and a call to duty dramatically alters your income and there is no reasonable alternative money source, the results of the Means Test can be rendered non-applicable.
You can also be granted a special circumstance for a sudden, serious illness that will take you out of your job or further damage the economic viability of your family. Job loss, in some cases, can lead to ability to file under the "special circumstance" exception to means test applicability. However, the job loss would have to be sudden, proven legitimate (you can't be found to have provoked it) and the income from that particular job itself would most likely have to had been the reason you failed the test.
There are other ways the results of the Means Test can be put aside. However, it is very important for you to understand that these are actual, legal strategies, not encouraged methods by which to circumvent the court. That's called fraud, and you'll be nailed for it.
The means test uses an average of your income over the six months prior to filing your case. That being said, you have the ability to time your bankruptcy filing according to a period in time when your income will be at its lowest. If you know bankruptcy is on the horizon but can sustain a few months without employment, you can file down the road to ensure your last six months of income fall below the state median, which is a major factor in the Means Test.
Additionally, expert bankruptcy attorneys can advise you on a number of ways that you can reduce the amount you will have to pay through a Chapter 13 plan. This is what bankruptcy professionals call "means test planning." Need health insurance? Purchasing a plan for you and your family before your bankruptcy is a good way to add expenses and reduce income. The code allows you to deduct what you pay for health insurance. The same applies for disability insurance. Been wanting to put away more for retirement? You can increase your 401(k) or 403(b) contributions through your employer and take the contributions as a deduction against your six-month average income in the means test.
You may not realize it, and in fact, they may be a reason for your having to file, but your rising mortgage and car payment may contribute to your passing the means test. Or, if you are expecting an increase in any of the interest rates on those loans, considering waiting until they kick-in to file.
The term "household" does not mean family. It means, quite literally, how many your "house holds." This means relatives, children who have moved back in after the backpacking trip around Europe and even that weird guy that rents the storage loft in the garage. And since the reform act in 2005 bases the median incomes for the means test on "household" and not family, the size of your household can have a serious impact in your favor. The more people who live in a house, the higher the threshold of income required to qualify for the means test.
It can be scary thing, the means test. It literally changed the benefits of bankruptcy for thousands and thousands of Americans. If you are worried about it or just have additional questions, don't hesitate to contact us. We have helped over 40,000 North Carolina families through the process of bankruptcy and our attorneys know the means test inside and out. Call The Law Offices of John T. Orcutt to schedule your FREE consultation at 1-888-234-4181.