What exactly is a means test?
One of the major changes to the bankruptcy laws in 2005 was the addition of another form that must be filed with the bankruptcy court known as a “means test” form. This form lists all household income from all sources for the past six months.
If the household income over the past six months is over the median income for Washington, the household expenses are subjected to a “means test” to see if there is enough money in the budget to pay some debt back through a repayment plan and, if so, how much the payment needs to be. If there is money in the household budget to pay some debt back, there is a “presumption of abuse” if someone files a Chapter 7 bankruptcy that does not provide for payments. This means that a Chapter 13 repayment plan would probably be required, though it is possible to rebut the presumption by showing that there are special circumstances that make it unfair to require a repayment plan. If the majority of the debt is business debt, as opposed to consumer debt, then the means test is not required.
The annual median household income figures for Washington as of March 15, 2010 are: $51,161 for a household of one, $63,930 for two, $72,275 for three and $82,422 for four (add $7500 for each household member over that). Social security income is not included.
The means test is a combination of some actual expenses, such as child support,mortgage payments, health insurance and taxes and some standard expenses defined by the IRS, such as food, clothing, transportation and rent. Often people with high expenses such as mortgages or health insurance can file a Chapter 7 without a presumption of abuse, even if their income is over the median. The means tests is a fairly complicated form and it is a good idea to consult an attorney to help fill it out.
Because the means test only looks at income received over the past six months, sometimes it makes sense to time a bankruptcy filing after a period of relatively low income if your income varies through the year. Even if your past six months income is below average, you may have trouble showing that you cannot pay any of your debt if you can count on a higher income throughout the year, but avoiding having to fill out the means test gives you more flexibility and makes it easier to use your real world expenses rather than having to use set standards defined by the IRS.
If it looks like a Chapter 13 repayment plan is necessary, you have to pay what you can afford through the means test for a five year period. If you want to file a Chapter 13 for other reasons, such as paying back mortgage arrears, and you “pass” the means test, you can propose a plan for as little as three years. The plan payment is the amount needed to pay back secured debt, such as mortgages and car loans, priority debt, such as back child support and taxes, plus an extra amount defined by the means test that would go to your unsecured creditors, such as credit cards and medical bills. Even if you have to pay back 100% of the unsecured debt, often a Chapter 13 plan is a much better way of dealing with debt other than budgeting and paying it outside of bankruptcy because the Chapter 13 eliminate interest and late fees and it gives you a certain day when you know you are out of debt.
Many people got the idea that Chapter 7 was eliminated by the 2005 law because it was often described as a burdensome law for debtors and a big win for credit card companies. Though the means test does make filing for bankruptcy more complicated, the basics of bankruptcy have not changed and a lot of people can still file a Chapter 7 with little worry. However, it is more important now than ever to seek the advice of an experienced bankruptcy attorney to guide you through it.
