The Bankruptcy “Means Test” Explained in English

06 Dec The Bankruptcy “Means Test” Explained in English

Few concepts are as difficult to grasp for a potential bankruptcy debtor than the “means test,” which Congress added to the bankruptcy law in 2005. To be sure, the means test can be confusing, and it has been roundly criticized both by lawyers and by judges in bankruptcy court decisions. While this brief article will not attempt to explain everything about the means test, it will explain the purpose of the means test, and help you to understand how to assist your lawyer in preparingit.

The key to understanding the means test is to know that it is financial formula, not unlike a tax return. The means test aims to predict (1) whether you can afford to pay off some or all of your debts, and thus should be required to filechapter 13 bankruptcy rather than chapter 7, and(2), how much you can afford to pay each month into a chapter 13 payment plan. The means test is a formula developed by Congress to answer the question of which type of bankruptcy, chapter 7 or chapter 13, is appropriate for you.

What Congress attempted to do through the means test was to establish a uniform method to enforce its desire that bankruptcy debtors who could pay back part of their debts in chapter 13 be made to do so. The means test is fundamentally an income and expenses test. Those who can afford chapter 13, based on the means test formula, in nearly all cases cannot file chapter 7.

The means test is only half the inquiry into your income and expenses, because when Congress enactedthe means test formulain 2005, it left untouched the “actual income and expenses” test it created in 1986. Yes, that’s right, there are two income and expenses tests in the bankruptcy law: the actual income and expenses testenacted in 1986, and the means test enacted in 2005. Each of these separate tests is designed to tell if you should be forbidden from filing chapter 7 because of your ability toafford a monthly payment in a chapter 13 case. It’s littlewonder, then, that people are confused about the income and expenses issue.

The important point to remember is that your lawyer will need to prepare two separate income and expenses statements for your chapter 7 or 13 bankruptcy: the means test and the actual income and expenses test.

The actual income and expenses test is based upon your current income and householdexpenses,projected into the near future. Unlike the means test formula, it is based on common sense and you can oftenprepare most of this statement yourself, without much input from a bankruptcy lawyer. The actual income and expenses test looks at your actual household budget,excluding the debts that would be discharged in a chapter 7 (or paid in a chapter 13). The question is, after taking away these debts, do your actual income and expenses allow you to make a monthly payment in a chapter 13 case? Just as with the means test, if the answer is yes, then you have file chapter 13 instead of chapter 7.

Because the means test is a formula using past income, along witha mixture of your actual expenses combined with arbitrary IRS-provided allowances for some of your expenses, it is next to impossible for you to prepareyour means testwithout your bankruptcy lawyer’s help. However, you can help your lawyer in doing this for you by being diligent in providing both past income information, and current household expenses information, and by understanding why your lawyer needs this information.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.

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