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The Means Test Explained - Part 1: An Introduction

With the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act in 2005, several significant changes were made to the process of consumers filing for bankruptcy protection. One change was a result of the banking and credit card lobby, which convinced Congress to institute the much-criticized chapter 7 means test, which primarily determines whether a consumer is eligible to file under chapter 7.

The means test was created to ensure that consumers who have the means to repay a portion of their unsecured debt, actually do so, if possible, in a Chapter 13 case. At least, this is the intention in theory, but in practice, the results differ since the means test does not seem to accomplish much in achieving its main purpose of actually preventing bankruptcy abuse. By arbitrarily determining income thresholds without regard to a debtor's actual ability to repay unsecured debt, it forces struggling middle-income debtors to file unfeasible five-year Chapter 13 plans, which may repay only a nominal amount to unsecured creditors.

The means test includes two stages. The first stage is actually quite simple and involves a comparison to the income figures for the debtor's state of residence. Thus, the income of the debtor's household is compared to the median income for households of similar size in Florida. Median income in Florida ranges from $44,021 for a family of one to $79,880 for a family of five as of November 1, 2016.

Here's where things get much more complicated. If income is, in fact, higher than the median income, then the means test is incomplete and a second calculation of income over a six-month is necessary to determine if any disposable income is available to pay unsecured creditors. “Disposable income” is defined as gross income less allowable deductions. Thus, a debtor must calculate his or her current monthly income (CMI) for a six-month period to arrive at the amount of disposable income.

If over a five year period of time disposable income would exceed the applicable income threshold or would be a sufficient amount to pay at least 25% of unsecured debt, the debtor may not obtain a discharge in a Chapter 7 case and must file a Chapter 13 case.

A presumption of abuse by a debtor occurs if the debtor does not pass the means test. Therefore, if the debtor instead proceeds with a Chapter 7 filing, this will constitute abuse. If the debtor's income exceeds Florida state median income for a household of his or her size, any interested party may seek dismissal of the case on the grounds of abuse.

The paperwork for determining all applicable deductions and completing the means test is an imposing, voluminous questionnaire that requires the debtor's current financial information, including a six-month earnings history necessary to compute CMI. It also involves a large number of mathematical calculations where one error may significantly affect the outcome of the test. An experienced bankruptcy attorney is essential in ensuring that the result of a means test is correctly determined.

Not everyone with current monthly income over the state median is required to take the means test. Those on active duty with the National Guard and Reserve and debtors with primarily business debts are not required to take the means test.

It is an essential requirement that anyone considering bankruptcy determine whether or not they qualify for a Chapter 7 filing based on the means test. The attorneys at Loan Lawyers may help any potential debtor accurately make this analysis. The experienced South Florida defense attorneys at Loan Lawyers are here to help you if you are considering bankruptcy. To schedule a free consultation at any of our three conveniently located offices, contact Loan Lawyers today by calling (888) FIGHT-13 (344-4813).