What is the Means Test?
Posted on Apr 3, 2012 in Bankruptcy, BAPCPA, Chapter 13, Chapter 7, Illinois, Wisconsin
Many people come in to our office fearing the dreaded means test. They want to file bankruptcy but are worried that this means test will not let them file a Chapter 7 bankruptcy, or that they will have to pay a ridiculously high Chapter 13 plan payment. They worry that if they do not pass the means test they cannot file a bankruptcy. This is simply not the case. This article hopes to give a basic understanding of what the means test is and clear up some of the misconceptions about the use of the means test in bankruptcy.
There are two main types of bankruptcy for most folks – Chapter 7 and Chapter 13. Chapter 7 is a chance to shed debt and move forward debt free, while a Chapter 13 is a repayment plan ranging from 3 to 5 years with debt forgiven after the plan completes. The purpose of the means test is to push filers away from a Chapter 7 when they can afford to make payments in a Chapter 13.
The first way to pass the means test is to be what is known as a “below median debtor.” While this sounds complicated, it is a very clear standard. To be below median you have to earn less than the median income for your state and household size for the previous six months. The median income levels, which can be found here is the 50% line for gross income in your home state for each household size. For instance, if you are a single individual in Illinois, and you make less than $45,545 per year based on those last 6 months of income, you are considered “below median”. But even if you do not qualify for below median status you still may pass the means test and be able to file a Chapter 7 bankruptcy.
The next step in the means test is to take account of your expenses. The expenses which can be taken are based off IRS standards, with a few exceptions for bankruptcy specific deductions. The expenses must be reasonable and the best thing to do is speak with an attorney about any deductions you might be entitled to. The deductions take into account car and mortgage payments, child care, child support, union dues, taxes, and many other expenses. Even if you do not pass this step you will still likely be able to file a bankruptcy, but it will have to be a Chapter 13. The outcome of the means test will determine what your unsecured creditors (loans, credit cards, utilities, medical bills, and so forth) must be paid back over the plan, so it can influence what your plan payment will be.
Hopefully, this article cleared up some of the basic misconceptions about the means test. The means test does not prevent filing a bankruptcy, but helps determine what type of bankruptcy a person can file – and, for some people, how much must be paid back through bankruptcy. As you can see, bankruptcy isn’t a simple question of “how much can I give” anymore. That is why a meeting with a licensed attorney who concentrates in bankruptcy filings can give you a clearer answer of your financial options. If you have further questions about the means test, bankruptcy or financial distress in general please contact the professionals at Lakelaw. Our team focuses on representing clients who face financial difficulty while treating our clients with Care, Kindness, Courtesy, Respect, Professionalism and Dedication.
This article was drafted by Lakelaw Associate Nicholas D. Strom