Bankruptcy Means Test
The bankruptcy means test is a calculation designed to identify debtors who can afford to pay some of their unsecured debts (for instance, credit card debt) and encourage repayment of these debts through a Chapter 13 repayment plan. The first part of the means test determines whether your current monthly income is less than your state’s median income for a household of your size.
If your family’s income is less than your state’s median income for a family of your size, you PASS the means test. There is no other testing and you can proceed with a Chapter 7 bankruptcy. The current state median income figures can be found at the U.S. Trustee’s website: http://www.usdoj.gov/ust/eo/bapcpa/meanstesting.htm.
If your family’s income is more than your state’s median income, you must complete the means test worksheet to calculate if you have (or should have) money to repay unsecured creditors. In the end if you are able to pay a significant portion of your unsecured debt, you will FAIL the means test and cannot file a Chapter 7 bankruptcy.
The truth is that most debtors pass the means test without any difficulty based upon their income. Others pass the means test after a skilled bankruptcy attorney has examined your income sources and made certain elections in completing the calculation. That is not to say that the test can be manipulated! On the contrary, the skilled bankruptcy attorney will work within the bankruptcy statutes, rules, case law, and local interpretations (which can vary a great deal among jurisdictions!) to obtain the best result from the means test.
If you would like to “test-drive” the means test, Nolo Publishing has a free on-line calculator. The Nolo calculator uses the language and formatting of Official Form B 22A, the means test form required in Chapter 7 bankruptcy cases. Be warned: passing the means test can be complex and is more than simply crunching numbers!
If you have questions or concerns about passing the means test, seek out competent legal advice. An experienced bankruptcy attorney can guide you through the means test to reach the best possible result for your circumstances.
Talk To An Attorney Before Taking A Second Job
Many individuals trying to make ends meet take on extra work to pay off debt. In some cases the added income is enough to make a difference. In other cases the second job makes no difference, or can even make the financial situation worse.
Working a second job can often create additional unexpected expenses. Additional travel, food, and child care costs are a few added expenses that will eat away at any increased income. A second job can create more stress on the family when one spouse is working and the other spouse must increase his or her responsibilities at home.
For some people increasing the family’s income can have a big negative consequence on a future bankruptcy. The bankruptcy “means test” is a calculation that determines whether your income is low enough for you to file Chapter 7 bankruptcy. The means test is designed to prevent individuals with the ability to pay creditors from filing a Chapter 7 bankruptcy. Higher income debtors must file Chapter 13 and repay their debts over five years.
When a family that would otherwise pass the bankruptcy means test increases its income, there is a danger that the increase will push the income over the threshold and force the debtors into Chapter 13. Additionally, the trustee may flag the case for abuse when a debtor voluntarily quits a job and decreases the family income prior to filing bankruptcy. The debtor is demonstrating that he could afford to repay something, but has chosen to not pay creditors by quitting the second job.
If you are struggling with debt, consult with an experienced bankruptcy attorney before taking on a second job. It is important to have an understanding of the risks involved and a clear strategy for getting out of debt. As the saying goes, “Hope for the best, but plan for the worst.” Just make sure that your plan doesn’t leave you in a worse financial position.
Unemployment and the Bankruptcy Means Test
The U.S. Department of Labor reports that since December of 2007 the economy has shed more than eight million payroll jobs. The number of unemployed workers has surged from 7.5 million to 15.7 million, and 36 percent have been out of work longer than six months. Many struggling families are unable to meet their monthly financial obligations and are filing for bankruptcy protection. The American Bankruptcy Institute reports that 135,914 consumers filed for bankruptcy in October, and total bankruptcies are projected to exceed 1.4 million in 2009, the highest figure in four years.
The recession has forced bankruptcy courts to examine the effect of unemployment on bankruptcy cases. The most challenging issue is whether an unemployed debtor can qualify for a Chapter 7 case, or if the debtor must file a Chapter 13 repayment plan case. The touchstone for determining this answer is the bankruptcy Means Test, which makes certain presumptions about the debtor’s finances and projects the debtor’s ability to pay debts based upon a historical six month average. Failing the Means Test means that the debtor is presumed to be able to repay some of the debts during a Chapter 13 bankruptcy.
Calculating the six month average income can be tricky when dealing with a recently unemployed individual. First, income has usually sharply decreased and the actual present monthly income is considerably less than the six month average calculated by the Means Test. Fortunately, most bankruptcy trustees and judges are compassionate when a debtor has lost a job, and this presumption of repayment may be rebutted by evidence by the debtor of the involuntary reduction of income, actual current income, employment status, etc.
Second, the Means Test income calculation includes any bonus or severance pay received during the six month period prior to the bankruptcy filing. This additional money may result in an inflated and inaccurate income calculation. Again, the presumption of an ability to repay can be rebutted, but the trustee and the bankruptcy court will require detailed financial records regarding how this money was spent.
Third, unemployed debtors often receive unemployment compensation pay. How unemployment benefits are applied in calculating current monthly income under the Means Test differs from one jurisdiction to another. The issue turns on whether the unemployment compensation is a benefit received under the Social Security Act and is therefore excluded from a debtor’s income calculation. Some courts have held that unemployment compensation is a benefit received under the Social Security Act and are excluded from the debtor’s current monthly income. See In re Munger, 370 B.R. 21 (Bankr.D.Mass. 2007): In re Sorrell, 359 B.R. 167 (Bankr.S.D.Ohio 2007). Other courts find unemployment benefits are not excluded. See In re Kucharz, No. 09-81258 (Bankr. C.D. Ill. 10/28/2009); In re Baden, 396 B.R. 617 (Bankr.M.D.Pa. 2008).
If your family has experienced an involuntary job loss and are struggling to make ends meet, consider your options. An experienced bankruptcy attorney can explain how the bankruptcy laws may help you restructure your finances and live within your means.
Self-Employed People Can File Bankruptcy Too
There are many strange misconceptions regarding bankruptcy. Some believe that a person is unable to file bankruptcy if the debtor is employed. Another myth is that self-employed people can’t file bankruptcy. These myths can prevent a person from obtaining needed relief from overwhelming debt.
Employment is not a precondition for filing for bankruptcy protection. The bankruptcy laws require that the debtor state all income for the past six months and list his or her current income. This income information is used to calculate the debtor’s ability to pay creditors. If the income information demonstrates that the debtor is able to pay a substantial amount to creditors over a five year period, the debtor may be ineligible to file Chapter 7 (a liquidation bankruptcy) and must file Chapter 13 (a repayment bankruptcy). Most employed debtors are able to produce the required income information from pay stubs, W-2s, and employer records.
Self-employed debtors must also produce income information for the six months prior to the bankruptcy filing and show current income. The bankruptcy trustee will require a self-employed debtor to show net income (gross business profit minus necessary business expenses). If you are self-employed and considering bankruptcy, it is time to start gathering income and expense information. If you do not already keep track of your business finances in a ledger or with computer software, it is time to start. You may have to recreate your income through bank records, and your expenses through receipts and memory.
If you are struggling with a debt problem that you cannot overcome, consult with an experienced bankruptcy attorney. Whether you are employed, unemployed, retired, disabled, or self-employed, an experienced bankruptcy attorney can suggest solutions that will end your debt nightmare. The federal bankruptcy laws are very broad and can help you and your family to a fresh financial start.