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From Executive Director
Everyone who files a Chapter 7 bankruptcy has to pass the Chapter 7 means test.
Why A Bankruptcy Means Test
Before the bankruptcy laws were changed in 2005, most people had a choice of whether they wanted to file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy and many chose Chapter 7. Because most creditors receive less under a Chapter 7 bankruptcy that they do under a Chapter 13, Congress felt that some people with higher incomes were improperly taking advantage of, or abusing, the bankruptcy process. To eliminate the perceived abuse, Congress created a legal process commonly called the “bankruptcy means test”. Now, the “means test” applies to all individuals who file bankruptcy under Chapter 7.
How The Chapter 7 Means Test Works
It is rather odd the way the “means test” was set up. There is not a test that you must pass before filing bankruptcy under Chapter 7. Instead, there is a test or legal process to determine if your Chapter 7 bankruptcy should be dismissed after it is filed.
The way it works is that once your bankruptcy has been filed under Chapter 7, the bankruptcy will be reviewed by people (bankruptcy trustee, creditors, etc.) involved or interested in the bankruptcy. After the review, everyone involved may believe that the bankruptcy under Chapter 7 is appropriate and let the bankruptcy run its’ normal course.
However, after the review, the Bankruptcy Court (Judge) itself, the United States trustee, the bankruptcy trustee or bankruptcy administrator, or any party in interest (a creditor) may file a motion to have your bankruptcy dismissed due the debts being primarily consumer debts or due to the belief that granting bankruptcy relief would be an abuse of the Chapter 7 bankruptcy laws. If a motion is filed, you must be given notice and then there is a Court hearing. After the hearing, the bankruptcy judge will either (1) find that there is not any abuse and allow the bankruptcy to continue or (2) find that there is abuse and either dismiss your bankruptcy or convert it to a Chapter 13 bankruptcy.
Because no one wants to go through the motion, notice, and hearing process and take a chance on having their bankruptcy dismissed, before filing a Chapter 7 bankruptcy everyone considers the possibility of the bankruptcy being dismissed after it is filed.
The Chapter 7 Bankruptcy Means Test Criteria
The “means test” is actually the criteria that Congress directed that bankruptcy judges use in determining if there is abuse of the Chapter 7 bankruptcy laws. Basically, the criteria is aimed at determining if you do not have the means with which to pay some or all of your debts. If it is determined that you do not have the means to pay all or part of your debts, then you pass the “means test”. If it is determined that you do have the means to pay all or part of your debts, then there is abuse of the Chapter 7 bankruptcy laws.
The Chapter 7 bankruptcy means test is comprised of a complicated set of questions and calculations. Following are the main questions:
1. Are your debts primarily consumer debts? Consumer debts are debts incurred by an individual primarily for a personal, family, or household purpose. The thought is that if most of your debts are classified as consumer debts, you may be able to pay something, even if it is a small amount, under a Chapter 13 bankruptcy and the Chapter 7 bankruptcy may be dismissed or converted to a Chapter 13.
Because just about all of an individual’s debts can be classified as consumer debts, this provision is aimed more at bankruptcies where most, if not all, of the debt is credit card or unsecured personal loan type debt. If you have a mixture of secured debt (home loan, car loans, etc.), priority debt (taxes, child support, etc.), and consumer debt, you will likely pass this part of the “means test” without any trouble.
Also, to keep creditors from abusing this provision in the bankruptcy law, if a creditor files a motion to have your bankruptcy declared an abuse of bankruptcy law and the bankruptcy Court rules that there is not abuse, the bankruptcy Court can order that the creditor pay your attorney’s fees associated with the motion.
2. Is your family income below the median income for the same size family in your state? If your income is less than the comparable median income, then only the bankruptcy judge, United States trustee, or bankruptcy trustee or administrator can file a motion to have your Chapter 7 bankruptcy dismissed for abuse. And they are not likely to do that unless it appears that you have some income, after expenses, which you can use to pay part or all of your debts.
3. If your income is greater than the comparable median income, then the next factor to determine is whether your current monthly income, after deducting certain expenses, and multiplied by 60 is less than (1) the greater of (a) 25 percent of your nonpriority unsecured claims in your case, or (b) $6,000, or (2) $10,000. If your income factor is less, then there is likely not abuse and your bankruptcy will likely not be dismissed. If your income factor is more, then the bankruptcy Court is instructed by law to presume that there is abuse of the Chapter 7 bankruptcy laws. You can rebut the presumption of abuse by presenting evidence that there is not abuse. Then the bankruptcy Court decides whether or not there is abuse of the Chapter 7 bankruptcy laws.
When calculating your income and expenses, consideration is given to whether or not you are married or legally separated. Also, there are special laws applicable to members of the Armed Forces under certain circumstances.
What Happens When You Fail The Bankruptcy Chapter 7 Means Test
When you fail the “means test”, your Chapter 7 bankruptcy will either be dismissed or converted to a Chapter 13 bankruptcy, if you agree to the conversion. If the bankruptcy is dismissed, there is no bankruptcy and you have to deal with your creditors without the benefits of bankruptcy. If your bankruptcy is converted to a Chapter 13 bankruptcy, then you will have to pay your creditors through the bankruptcy trustee at least some money each month. But you may have to pay your creditors only a small portion of what is owed.
Talk To A Bankruptcy Attorney
As you can see, the Chapter 7 means test is complicated. Also, because it is really not a test before filing to determine if you can file bankruptcy under Chapter 7, but a legal process after filing to determine if your case should be dismissed or converted to a Chapter 13, you should consult with a bankruptcy attorney.
This is general information only. If you have any questions whatsoever, talk with a lawyer licensed in your state who has experience with Chapter 7 bankruptcy, Chapter 13 bankruptcy, or bankruptcy in general.
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