With the introduction of the BAPCPA of 2005 filing bankruptcy has taken on a new complexity. One of the things added to a bankruptcy filing is the means test. Prior to 2005, Congress felt that too many Americans were abusing the bankruptcy system and wanted to make it tougher for those to file for bankruptcy. So to do this, they came up with the means test. To the person that has no knowledge of the new bankruptcy filing process the means test can be quite confusing. Most people look at it as they would typical accounting. In fact, the person that gets the most confused about the new process is an accountant. It's hard for them to get past the unusual way that income is figured out.
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What one needs to do to understand the bankruptcy filing means tests is to know that it's just a financial formula. Trying to use accounting methods and math won't work. You have to learn to plug the numbers into the bankruptcy means test formula. The idea behind the means test is to allow the court to be able to figure out if an individual is capable of paying off some or all of their debts. If the bankruptcy court believes that someone can pay off some of their debts based on the means test, they will be pushed into a Chapter 13 bankruptcy rather than filing Chapter 7. The formula is also used in a Chapter 13 bankruptcy to help figure out the amount the individual can pay on the Chapter 13 plan. In a nutshell, the means test was created by Congress to help the court decide whether a person needs to file Chapter 7 bankruptcy or Chapter 13. Congress was attempting to create uniformity in all bankruptcy filing chapters.
What's interesting is Congress left the income and expenses test that was created back in 1986 fully intact in the current bankruptcy code. So right now, there are actually two income and expenses tests when you include the means test. Passing the means test only makes the debtor halfway there to filing Chapter 7 bankruptcy. The bankruptcy court also looks at the income and expenses test also to qualify the individual to file Chapter 7.
The means test uses a formula of a look back timeframe to give an individual their annual median income. How it works, the individual filing for bankruptcy starts with their income for the month prior to filing bankruptcy and goes back a total of six months for a grand total. Next, the individual will divide it by six and multiply it by 12 to get the annual median income. Lastly, take that number and compare it to the median income chart for the state the individual resides in. If it is close to or less than, the debtor has passed the means test. But wait, the debtor is only halfway there. To qualify to file Chapter 7 bankruptcy the debtor will need to pass the income and expenses test. The debtor has to fill out the schedule that has a list of all their household expenses and compares it to their current income. What it looks like is an actual household budget. What the court wants to see is that the debtor has no or little money left over after paying their household expenses with their current income. If there is any disposable income left over at the end of the month, the bankruptcy court might push the debtor into filing a Chapter 13 bankruptcy. You can see how it has become very complicated to file for bankruptcy with all the added hoops to jump through. It's a good idea to leave it up to the experts and have a bankruptcy attorney complete the task.
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