The Bankruptcy "Means Test" And You
Under the The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) a mathematical formula called the “Means Test” helps establish who can declare Chapter 7 bankruptcy. Before BAPCPA debtors of all income levels could file for Chapter 7 protection, but now filers with higher incomes will be directed to file Chapter 13 if they do not pass the means test. This formula takes into account:
- The average monthly household income for the six month period of time before filing bankruptcy;
- The median income level for a similar sized household in your state; and
- The average monthly allowed deductions applied against your average gross income (income before taxes are taken out).
What This Means For You
If your household’s annual income is less than the Ohio median income level for your household size, you pass the means test and you can file for Chapter 7 or Chapter 13. This is based on the average gross household income for the 6 months before filing multiplied by 12. If your household income is higher than Ohio’s median income level for your household size, you must then complete a long calculation that applies certain deductions to your gross income to estimate what your ‘disposable income’ will be over the next five years. The result of this calculation determines whether you can file for Chapter 7 or if Chapter 13 is your only option.
One caveat of the means test is that only filers with debts that are primarily consumer debts (including, but not limited to the following types of debt: credit card debt, payday loans, unsecured lines of credit, mortgages, etc.) must complete this disposable income calculation. If your debt is primarily business debt these calculations do not come into play.
If you decide to file a Chapter 13 case or if the means test forces you into filing a Chapter 13 case this calculation also helps determine if your case will last a minimum of 3 years or a maximum of 5 years. If your yearly income is greater than your state’s median income level then your Chapter 13 plan will need to last the entire 5 years unless you can pay back 100% of your unsecured debt in a shorter period of time. If you are below the state’s median income level then the plan can last anywhere between 3-5 years; depending on your particular circumstances.