What to know about the bankruptcy means test

Many consumers in Shreveport, Louisiana, consider bankruptcy when they don’t see a way out of debt. The most popular bankruptcy type is Chapter 7, which liquidates assets to pay certain unsecured debts. However, the filer must meet certain requirements before they can proceed, which includes a means test.

How the means test works

In 2005, Congress made several changes to the bankruptcy code, which became the Bankruptcy Abuse Prevention and Consumer Protection Act. It added the means test to determine their eligibility by figuring if they have enough disposable income to pay debts. Too many high-earning filers who had enough to pay debts were using Chapter 7 bankruptcy to avoid paying their debts.

The means test compares a consumer’s income to that of a household of similar size and compares it to the state median. If the consumer makes is over the median income, they proceed to the next step, which subtracts allowed expenses from their gross income. Some allowable expenses under National Standards set by the IRS include mortgages, transportation, rent, medical, food, and clothing.

Failing the means test

If a consumer fails the means test, they cannot proceed to file Chapter 7, or presumption of abuse may apply. They can dismiss the case or file Chapter 13, a repayment plan that spreads payments of three to five years to pay creditors.

However, the consumer needs sufficient income to make and maintain payments and not exceed a certain debt threshold. A consumer who fails the means test cannot appeal the decision, but they can wait to file again. The means test is based on six months of income, so if they wait, their income levels could change.

Bankruptcy doesn’t have to be embarrassing or thought of as negative. However, since bankruptcy affects credit temporarily, consumers should study their options.