Means Test – What Is It?

The Means Test – What Is It?

Birmingham Bankruptcy Attorneys knowledgeable in “means test” calculations

The recent bankruptcy code amendments include a brand-new “means test” to determine whether a filer is eligible for Chapter 7. Congress added the means test as a way to prevent bankruptcy abuse; that is, to limit Chapter 7 protection to those who truly cannot pay their debts. The means test is a two-part test to determine Chapter 7 eligibility, first by comparison of the debtor’s income to the median income of similarly situated debtors in that state, and next by a calculation of the debtor’s surplus, or disposable, income after expenses that the debtor has available to pay down his or her debt. If a debtor fails the means test, then he or she is not eligible for Chapter 7 bankruptcy, but may still be able to file for Chapter 13 reorganization.

The first part of the means test is a threshold test. If the debtor passes this first part, then the debtor is automatically eligible for Chapter 7 without further review. The threshold test is relatively simple: Does the debtor earn less current monthly income than the median income for a household of the debtor’s size in the debtor’s state? If the debtor earns less than the comparable state median monthly income, then he or she may file for Chapter 7 bankruptcy. If his monthly income exceeds the median, then we move to the second step of the means test.

Under the second part of the means test, we calculate how much leftover (“disposable”) income a debtor has after subtracting “allowed” expenses such as basic necessities, housing, and transportation costs. The allowed amounts for each of these categories varies by state. We then calculate whether the there is enough leftover disposable income to pay a specified percentage of the debtor’s unsecured debts (like credit card bills). If the debtor does not have enough income after expenses to pay this percentage of his debt, then he passes the means test and is eligible for Chapter 7. If the debtor is determined to have enough disposable income to pay the statutory percentage of his debts, then he fails the means test and may not proceed under Chapter 7, although he may still be eligible for a Chapter 13 payment plan.

The median standards in Alabama, effective April 1, 2013, are:

Persons in Household Monthly Annual
1 $3,343 $40,120
2 $4,097 $49, 163
3 $4,351 $52, 215
4 $5, 392 $64,700
5 $6,067 $72,800
6 $6, 742 $80,900
7 $7,417 $89,900
8 $8,092 $97,100
9 $8, 767 $105,200
10 $9,442 $113,300

The means test has been criticized as ineffective and costly. It keeps a lot of otherwise eligible consumers from getting the protection that Chapter 7 bankruptcy offers, while statistics show that it has done little to decrease the instances of bankruptcy abuse.  You will want an experienced debt relief attorney to help guide you through the means test calculations and determine your bankruptcy eligibility. If you are considering filing for bankruptcy or simply want to learn more about your options with regard to your financial situation, contact the Birmingham legal team of Parkman White, LLP today for a consultation at 205-502-2000 and let us put our experience to work for you.