Myth: The Chapter 7 means test will disqualify me from filing bankruptcy—or force me into a debt repayment plan.
Fact: Most people with debt problems have no problem passing the Chapter 7 means test. With proper counseling from an experienced bankruptcy lawyer, even people who fail the means test can still qualify for relief.
What is the Chapter 7 means test?
Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, you must undergo a means test to determine whether you are qualified to file Chapter 7 bankruptcy. If your current monthly income is below the Texas adjusted median income, then you are automatically presumed to have filed bankruptcy in good faith.
Means testing only applies in bankruptcy cases involving primarily consumer debts, such as credit card debt, hospital bills, home mortgages, and vehicle loans. It does not apply to bankruptcy cases involving business or income tax debts. An experienced bankruptcy lawyer can let you whether Chapter 7 means testing applies in your case.
What is currently monthly income?
Current monthly income (CMI) is the average monthly income you received during the six months before your bankruptcy case is filed. CMI may not reflect your actual current monthly income. For example, if you worked for four months out of the six months before filing for bankruptcy but are unemployed on the date you file, then your CMI is calculated as an average of the prior six months—the four months you were working and the two months you were unemployed. Also, some income (such as Social Security benefits) is excluded from CMI.
What happens if I fail the Chapter 7 means test?
If your income is above the Texas adjusted median income, a secondary means test can be performed to determine your disposable income. This test deducts expenses such as car payments and retirement plan contributions from your income to determine whether you qualify. This is also known as the disposable income test.
With proper counseling from an attorney, who fail the first Chapter 7 means test can still quality using the secondary means test. For example, you can reduce your current monthly income by increasing your 401(k) contributions or even buying a new car. Before you do anything, however, you should seek the advice of an experienced bankruptcy attorney or your case could be dismissed for abuse.
If the presumption of abuse arises, you may overcome the burden by showing special circumstances to the court. In my experience, special circumstances can be proven in most cases involving above median income debtors.
What if I fail both Chapter 7 bankruptcy means tests?
If you do not pass the either of the bankruptcy means tests, you may still file Chapter 13 bankruptcy. Chapter 13 bankruptcy is essentially a debt repayment plan.
Free Consultation: Contact Board Certified bankruptcy attorney Fred E. Walker in Austin, Texas, to learn more about the Chapter 7 bankruptcy means test and how it applies to you. There is no cost or obligation.