The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created the bankruptcy means test as a way to prevent abuse of the Chapter 7 bankruptcy system. The means test is a formula devised to restrict bankruptcy petitioners with higher incomes from wiping out their debt entirely under Chapter 7 when they could be repaying a portion of their debts under Chapter 13. However, this does not necessarily mean consumers have to be flat broke in order to qualify for Chapter 7 bankruptcy relief, and only debtors with mostly consumer debts, not business debts, are required to take the means test.
A debtor who is below the median income, which is currently $47,790 for a household size of 1 in New York State, does not need to take the means test. A debtor who is married or has kids will have a larger household and the median income threshold is higher. For example, currently in New York State the median income for a family of 2 is just over $59,000. So a single parent whose income is below $59,000 will not be required to take the means test.
Current monthly income is defined to be the average income over the last six months before filing for bankruptcy. If a debtor is above the median income deductions can be used to pass the means test.
Most of these deductions are a set of national and local standards defined by the IRS. For instance, a debtor residing in New York County can take a $3,000 deduction for mortgage/rent expenses and in Kings County the deduction would be $1,735. There are also deductions for health care, clothing and other necessary expenses. Similarly, a good attorney can take deductions for charity, exceptional medical expenses and childcare expenses to name a few. Once deductions are taken the debtor needs to have little if any “disposable income”, i.e., income left over after taking the means test. If there is significant disposable income left over the debtor can still qualify for Chapter 13 Bankruptcy protection.
If a debtor has disposable income on the means test he/she may still qualify for a Chapter 13 repayment plan, which will allow the repayment of a small portion of debt on a 3-5 year payment plan managed by the court. While Chapter 13 often requires a repayment of a small portion of debt, it is often the best option for many types of financial problems.
Furthermore, just because you qualify for Chapter 7 bankruptcy by passing the means test doesn’t mean it is always the best solution for you. Working with an experienced attorney is critical to filing any type of bankruptcy, and they will help you consider all your bankruptcy options before filing.
If you live in New York and are considering bankruptcy relief please contact the Law Office of William Waldner for a free bankruptcy consultation. After the free consultation you will understand how the means test will affect your case, and if filing a Chapter 7 bankruptcy, or a Chapter 13 bankruptcy is right for you. We only practice Bankruptcy Law and are always here to help.
Call 212-244-2882 to arrange a free bankruptcy consultation today. Mention this blog post when scheduling by referencing the promotional code: MNT212 to receive the required 3 bureau credit report, and required credit counseling course, both free with any signed retainer agreement.
This article is intended for educational purposes only. By reading this article no attorney-client relationship has been created.