The Bankruptcy Means Test
The bankruptcy “means test” is detailed calculation that may be necessary to determine your eligibility for Chapter 7 bankruptcy filing.
The Bankruptcy Means Test
The main intent of the means test is to determine if you have sufficient “disposable income” that could be used to pay back your creditors.
The means test calculation considers your household income, your family size and your household expenses. Which are based on both IRS standards for your family size and your actual expenses, depending on expense category. The means test then uses these various inputs to “test” whether or not you have “means” to repay your debts. Unfortunately, calculating disposable income through the means test is a very complex process. Moreover, it typically requires the assistance of an experienced bankruptcy lawyer to ensure that if calculation is done properly.
Means test was designed to limit debtors who are eligible to have their debts discharged through Chapter 7 bankruptcy. However, most people who take the means test tend to pass it. Especially those households with multiple dependents, multiple car payments, health insurance, life insurance and other allowable household expense deductions. To sum up, the means test is intended to be used as an objective test. Mainly to ensure a debtor filing for Chapter 7 is not able to afford to pay back its unsecured creditors. For instance, credit card bills, medical bills and other unsecured debts.
If means test results in little to no disposable-income, then means test will result in being “no presumption of abuse”. Likewise, as saying that you are eligible for a Chapter 7 bankruptcy. On the other hand, if the means test results in significant disposable income, then “there is a presumption of abuse” and (absent special circumstances) you will not be eligible for a Chapter 7 bankruptcy.
If you have too much disposable income to file a Chapter 7 bankruptcy, you may want to consider a Chapter 13 bankruptcy, where the amount of disposable income calculated through the means test will determine your minimum monthly payment to unsecured creditors, which would be paid over a three-to-five year period through a Chapter 13 plan.
The means test calculation is performed through completion of Official Bankruptcy Form-122, which is actually made-up of three separate forms.
Form 122A-1; titled Chapter 7 Statement of Your Current Monthly Income
Official Bankruptcy Form 122A-1 is the starting point, and Form 122A-1 only requires that you enter your marital status, your actual income during the 6-month period prior to the bankruptcy filing and the size and location of your household. The form then compares your household income to the median family income for your state and household size. If your household income is less than the median income for your state and household size, then the process stops there, and there is “no presumption of abuse”, meaning that you are eligible for a Chapter 7 bankruptcy without needing to complete the other remaining “means test” forms (i.e., the Official Forms 122, as outlined above).
If your household income is more than the median income for your state and household size, then you need to complete Form 122A-2 to determine if there is any “disposable income”, which would lead to a presumption of abuse (again, whether or not there is a presumption of abuse is really just another way of saying whether or not you are eligible for a Chapter 7 bankruptcy filing).
Form 122A-1Supp; titled Statement of Exemption from Presumption of Abuse Under §707(b)(2)
Official Bankruptcy Form 122A-1Supp, titled Statement of Exemption from Presumption of Abuse Under §707(b)(2), is a form that is used if you believe that you are exempted from a presumption of abuse. The conditions that may act as an exemption include situations where your debts are not primarily consumer debts, or if you are a disabled veteran, or are a Reservist or member of the National Guard that was called to active duty or performed a homeland defense activity during certain time periods.
Form 122A-2; titled Chapter 7 Means Test Calculation
If Form 122A-1 results in household income above the median income, which suggests a “presumption of abuse”, and none of the exemptions from Form 122A-1Supp apply, then you must calculate your “disposable income” by completing all of the details in Form 122A-2, which is the official bankruptcy form used for the Chapter 7 Means Test Calculation
Disposable Income
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