The New Bankruptcy Means Test Explained in Plain English
Below is a MRR and PLR article in category Reference Education -> subcategory Legal.
Understanding the New Bankruptcy Means Test
Summary:
This article clarifies the means test introduced by the new bankruptcy law, highlighting why more individuals will be directed towards Chapter 13 instead of Chapter 7 starting October 2005. We’ll break down the calculations with straightforward examples to enhance understanding.
Keywords:
new bankruptcy law, Chapter 7, Chapter 13
What’s Changed?
The new bankruptcy law, effective as of October 17, 2005, introduces a "means test" that determines eligibility for Chapter 7 or Chapter 13 bankruptcy. This article aims to simplify how this test works, helping you understand its impact.
Chapter 7 vs. Chapter 13
Traditionally, Chapter 7 allows for the complete discharge of unsecured debts, providing a fresh start. Chapter 13, however, involves repaying a portion of the debt over 3-5 years, with five years being typical under the new law.
Previously, many chose Chapter 13 to protect the equity in their homes or other properties. The new law now forces more people into Chapter 13 based on income, even if they don’t have equity.
How the Means Test Works
The means test examines your average income for the six months prior to filing and compares it to your state’s median income. For instance, California’s median income for a single earner is $42,012. If your income is below this, Chapter 7 remains an option. If it’s above, further calculations are needed.
Calculating Repayment Ability
1. Calculate Disposable Income: Subtract your living expenses, excluding debt repayments, from your income.
2. Multiply by 60: This gives the amount available over five years for debt repayment.
- If you have $10,000 or more available, you must file Chapter 13.
- For example, $200 of monthly disposable income results in $12,000 over five years, exceeding the $10,000 threshold, leading to Chapter 13.
Special Conditions
- Under $166.67 Monthly: If your available income is less than this, another calculation determines eligibility.
- Below $100 Monthly: You can still opt for Chapter 7.
- Between $100 and $166.66: Compare this total to 25% of your total debt.
For instance, with $50,000 debt and $125 available monthly income ($7,500 over five years), you’d be under the 25% threshold for Chapter 7. However, with $25,000 debt, the proportion is higher, leading to Chapter 13.
Steps to Determine Your Path
1. Check Median Income: Compare your income to your state’s median, accounting for spouse income if applicable.
2. Calculate Disposable Income: Subtract living expenses from monthly income and multiply by 60.
3. Evaluate Outcomes:
- Over $10,000: Chapter 13.
- Below $6,000: Potentially Chapter 7.
- Between $6,000 and $10,000: Compare to 25% of your debt.
Important Considerations
The court uses IRS guidelines for living expenses, not your actual expenses. These figures may significantly impact your case. Some expenses might not be allowed, leaving you with less disposable income than expected. How courts will handle cases with high mortgage or rent expenses is still uncertain.
In conclusion, while the new bankruptcy means test may steer more people towards Chapter 13, understanding these calculations and legal stipulations will help you navigate your options more confidently.
You can find the original non-AI version of this article here: The New Bankruptcy Means Test Explained in Plain English.
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