The Means Test

Before October 17, 2005 almost anyone could file Chapter 7 bankruptcy. The new bankruptcy law (effective October 17, 2005) includes a two part test of Chapter 7 eligibility. The first test in every Chapter 7 filing is the “means test.” The means test is a mathematical formula to determine who is eligible to file Chapter 7 bankruptcy. The means test applies only to people whose debts are primarily consumer debts. Consumer debtors include credit card debts, car debt, or mortgages for the primary residence. Many people file bankruptcy because of non-consumer debt such as debts from a failed business, large business related judgment or delinquent mortgages on investment real estate. Those people whose debts are primarily business or investment debts, or debtors who owe primarily other non-consumer debts such as taxes or student loans, are exempt from the means test; these people may file Chapter 7 bankruptcy regardless of their income and expenses. Most importantly, if your family income is less than the median income for similarly sized Florida households you too are exempt from the means test. As of December, 2010, the Florida median income for a two-person household is approximately $50,000. The median income for a single person is approximately $40,000.

The means test formula is designed to evaluate whether the debtor has the financial means to pay back a substantial part of his debts in a repayment plan through Chapter 13 bankruptcy. The means test formula considers measures of income and allowable expenses. If, according to results of the formula, you do not have sufficient net monthly income to repay debts you are eligible to file Chapter 7; if the formula says you can repay your debts you are not eligible for Chapter 7 bankruptcy unless you prove “special circumstances” of hardship such as a recent job loss or medical problem. If you do not pass the means test you still may be eligible for relief in Chapter 13 bankruptcy.

The means test formula is very complex and some of its terms are counter-intuitive. The formula incorporates a variety of government statistics from several sources as well as information about each debtor’s financial situation. Calculations under the formula are difficult to do without a professional computer program designed for bankruptcy attorneys to prepare bankruptcy petitions.

If a debtor passes the means test a presumption of eligibility is created to file a Chapter 7 bankruptcy, but the means test is not the only test applicable to Chapter 7 eligibility. The new bankruptcy law includes another test under Section 707(b) known as the “good faith” or “abuse” test. The United States Trustee, or any other creditor in your case, may request the Court to dismiss your Chapter 7 filing if they allege that the filing was done in “bad faith” or was otherwise an “abuse” of the bankruptcy system even though the debtor passed the means test. The abuse or good-faith test is applicable only in those cases when the U.S. Trustee or other creditor files a motion to dismiss. If in the light of all relevant financial and family circumstances it appears that you have the ability to repay a significant amount of your unsecured debts a Court could dismiss your Chapter 7 if the filing appears to be abusive. Whereas the “means test” is mostly a objective mathematical computation, the “abuse” test is subjective. The court must consider all relevant circumstances in evaluating the U.S. Trustee’s allegations of abuse. Therefore, it is difficult to predict with certainty whether debtors above median income can survive allegations of bankruptcy abuse under Section 707(b). Different court decisions have expressed a variety of facts and circumstances relevant to findings of abusive Chapter 7 cases.

The abuse or good faith test is inapplicable to debtors below median income and is not applicable to debtors above median income who are excused from the means test because their debts are primarily non-consumer debts, such as business debt.

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