THE BANKRUPTCY MEANS TEST–A BRIEF OVERVIEW
If you have recently contemplated filing bankruptcy, you may know that the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) requires that all debtors take a “means test” prior to filing bankruptcy. So what is the means test, and what are the consequences if the debtor “passes” it or “fails” it.
What Is the Means Test?
The means test compares the debtors’ household income to the median household income of an Oklahoma household of the same size. The median income for various households Oklahoma can be found on the United States Trustee’s website which can be found at this web address: http://www.justice.gov/ust/eo/bapcpa/20120501/bci_data/median_income_table.htm . As you can see from the table, after May 2012 the median income for a household of four in Oklahoma is $62,301.00 a year. That means that half of all Oklahoma four member households earn less than $62,301.00 a year and half earn more.
What Happens if I “Pass” the Means Test
If you “pass” the means test–that is your household income is below median–you can file a Chapter 7 bankruptcy without raising any “presumption of abuse”. Most debtors prefer to file a Chapter 7 bankruptcy, because the bankruptcy case is filed and closed within about 90 days, monthly payments to a bankruptcy trustee are not required, and Chapter 7 debtors rarely lose any assets.
What Happens if I “Fail” the Means Test
If you “fail” the means test–that is you household income is above median–you may have to file a Chapter 13 bankruptcy and make monthly payments to a Chapter 13 bankruptcy trustee for 60 months. However, you should be aware that not all debtors with incomes above median are required to file a Chapter 13 case. You are allowed many deductions against your income to determine if you have sufficient disposable income to make Chapter 13 plan payments. If your allowable expenses exceed your income you have negative disposable income and even though you are above median income, you may still be allowed to file a Chapter 7. I estimate that more than 80% of debtors I represent who are above median income are still eligible to file a Chapter 7 case, and debtors that have to file a Chapter 13 are still able to obtain significant debt relief in Chapter 13.
Means Test Doesn’t Apply if Debts Are Not Consumer Debts
The means test only applies if the debtor has primarily consumer debts–meaning consumer debts total more than 50% of all debts. Consumer debts are debts incurred primarily for personal, family or household purposes. Car loans, home loans, student loans, medical debts and most credit card debts are almost always considered consumer debts. Tax debts, business leases, SBA loans, debts to inventory suppliers and business utilities are almost always considered non-consumer debts. In determining whether your debts are consumer or non-consumer, the question is what was the debt incurred for. Credit card debts are almost always consumer debts, but if the debtor charged $50,000.00 on credit cards to purchase business supplies, pay business rent or rehabilitate a rental house, the credit card debts are non-consumer debts.
Under BAPCPA, the means test has become an important part of filing bankruptcy. If you are above the median income, don’t panic and don’t assume bankruptcy is not an option. Call my office for an appointment. I will prepare a means test for you and I will advise you what options are available to you to deal with your debts.