If you are contemplating filing for bankruptcy, you have probably suffered a tragic event in your life. Possibly a serious injury to you or your spouse, loss of a job, or closure of your business. You may find yourself incurring a significant amount of debt, through no fault of your own. The need to survive and to put food on the table for your family may require you to use credit cards or borrow money that you hope to be able to repay at some future date.
If you find yourself in this unenviable position, you may decide that filing for bankruptcy is your best option. But, how do you know if you qualify for bankruptcy? You should first speak with a bankruptcy attorney who can help you navigate the formula of the Means Test.
The bankruptcy “Means Test” is a formula designed to keep people with a large household income from filing for Chapter 7 bankruptcy. This does not mean that you are prohibited from filing bankruptcy because you earn a good salary. You may still qualify for Chapter 7 if your expenses are large enough to offset your income. Also, if you fail to qualify, then you may still be eligible for Chapter 13 bankruptcy.
It is important to know that only bankruptcy filers with primarily consumer debts – not business debts – need to take the means test. If your debts are primarily business debts, then you automatically qualify for Chapter 7 bankruptcy. There have been a number of cases decided about whether a debt is considered a consumer debt or business debt, so talk with an experienced bankruptcy lawyer if you are not sure whether your debts are consumer or business.
HOW DOES THE MEANS TEST WORK?
The means test was designed to limit the use of Chapter 7 bankruptcy to those who cannot repay their debts. It does this by deducting specific monthly expenses (derived from the Internal Revenue Service for National and Local Standards) from your “current monthly income” (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly “disposable income.”
The first step of the means test is to determine whether your income is more or less than your state’s median income attributable to the size of your household. If you earn less than the median income for a household of your size in your state, you pass. You’re done. You do not need to complete the rest of the means test. You can file for Chapter 7.
WHAT IF I MAKE MORE THAN THE MEDIAN INCOME?
For those whose household income exceeds the state median, the Means Test computations become more complicated. You must determine whether you have enough disposable income, after paying your allowed monthly expenses, to pay at least a portion of your unsecured debts. If your disposable income adds up to more than a certain amount as prescribed by the Bankruptcy Code, you have failed the Means Test and must consider an alternative to Chapter 7. The only way you can still file Chapter 7 is if you can rebut the presumption of abuse by demonstrating to the Court special circumstances that either justify additional expenses or an adjustment to your income.
WHAT IF I DON’T PASS THE MEANS TEST?
If you don’t pass the means test, you’re limited to trying to work out settlements with your creditors outside of bankruptcy or you can file Chapter 13 bankruptcy. Chapter 13 requires you to propose a plan for repaying your creditors with monthly payments over a three- to five-year period. Most people who file for bankruptcy prefer Chapter 7, which typically requires no repayment of debt and is less expensive than Chapter 13.
However, Chapter 13 bankruptcy is still the best way to handle specific problems, like curing a default on a home mortgage and repaying debts that will not go away in bankruptcy, such as most taxes and child support arrearages. But before you settle on Chapter 13 bankruptcy, be sure to talk to a lawyer. You might find that you are able to pass the means test after all.
If you are struggling to pay your debts and concerned about the future welfare of you and your family, it is important that you seek the advice of a bankruptcy lawyer to ensure that your assets are protected and the debts you seek to eliminate are dischargeable. Our attorneys have been assisting consumers and business owners with bankruptcy matters for over 25 years. If you are considering filing for bankruptcy, please consider contacting the Nomberg Law Firm. Our office number is 205-930-6900.
Steven D. Altmann has been a lawyer for more than 25 years. Steve has earned an AV rating from Martindale-Hubbell’s peer-review rating and was recently named a Super Lawyer and Top Attorney by Birmingham Magazine in the area of Bankruptcy Law.
We are a Federal Debt Relief Agency. We help people file for bankruptcy relief under the U.S. Bankruptcy Code.