The means test is a test established under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). This requirement examines a debtor’s income and compares it to the median family income for the debtor’s state and household size. If the debtor’s income exceeds that of the median family income for their state and household size, it is presumed the debtor can repay all or a portion of their debt through a plan of reorganization, in which case the debtor would be directed to file a chapter 13 bankruptcy instead of a chapter 7 bankruptcy.
This is important because a chapter 13 plan term could be from 3 – 5 years, whereas chapter 7 has no repayment plan. Chapter 7 is usually cheaper, easier, and quicker than repayment plans. One should not decide whether to file chapter 7 or chapter 13 simply based on not wanting to participate in a payment plan. Chapter 13 offers many perks the debtor cannot get in a chapter 7 case, such as discharging a divorce property settlements or equalization payments, avoiding, or removing certain liens, protecting noon-exempt assets from a forced sale, or stopping a foreclosure sale. The benefits of bankruptcy are too numerous to cover in this short blog.
The means test generally uses the debtor’s last six-months of income to compare it to the median family income. Many incorrectly assume that because your income exceeds the median family income you must file a chapter 13 plan. Even if your income exceeds the median family income, the result is just a presumption of abuse.
A presumption may be rebutted by evidence proving there is no disposable monthly income to fund a chapter 13 plan due to allowed monthly expenses. Moreover, a means test may not apply at all if the debtor’s debt is primarily non-consumer debt. Examples of non-consumer debt would be business debt, tax debt, some student loan debt, SBA loans, personal guarantees of business debt or legal fees related to business matters.
Do not let the means test discourage you from pursuing bankruptcy relief. Work with a reputable attorney who can help strategize the best option for you based on your circumstances. Every case is different.
Author: Jenny L. Doling, Esq., LLM Taxation
CA State Bar Certified Bankruptcy Specialist
Secretary and Board of Director of NACBA
President of the San Diego Bankruptcy Forum
Serving Bankruptcy Clients throughout California and
Tax Clients Nationally