The Chapter 7 Means Test

Detroit Chapter 7 and Chapter 13 Consumer Bankruptcy Filings

 I, Walter Metzen, will provide, free of charge as part of your free initial Bankruptcy Analysis, a means test calculation to determine if you are eligible for Chapter 7 Bankruptcy.  Nearly 90% of the people who walk through my door are eligible to file a Chapter 7 Bankruptcy and get a permanent discharge of their debt.
 

When you file a Chapter 7 bankruptcy petition in Michigan or any other state, the means test is performed to make sure that you, the debtor are eligible to file Chapter 7 bankruptcy and aren’t “abusing” the system. That might sound intimidating, but it’s a simple test, and the vast majority of debtors qualify for Chapter 7 bankruptcy.

The Chapter 7 means test focuses on two aspects of your income and expenses and takes the nature of your expenses into consideration.

The first stage of the test compares your current monthly income (as determined by a worksheet provided by the courts) to the median (average) income for your geographical area and household size. If your monthly income falls at or below the median, the means test is over and you pass—there is no presumption of abuse and you can file for Chapter 7 bankruptcy.

The median is determined by your geographic location and the size of your family and is generally based on data acquired from the Census Bureau. Depending on your state, the 2005 median income for a family of four ranged from $47,256 to $88,401.  Once you've calculated your income, compare it to the median income for your state. (You can find median income tables, by state and family size, at the website of the United States Trustee, www.usdoj.gov/ust; click "Means Testing Information.")

If your income exceeds the state median, it doesn’t necessarily mean that you can’t file under Chapter 7. Instead, it triggers the second phase of the test. During the second step, allowable expenses are deducted from your monthly income based on IRS standards. The amount that’s left over after those allowable expenses is your disposable income. That number is multiplied by 60 to determine how much disposable income you’ll have over the next five years.

 Contact me, bankruptcy attorney Walter Metzen to learn more about how I can help you get a Fresh Financial Start!.

If that total is less than $6000, the means test is over—there is no presumption of abuse and you can file bankruptcy under Chapter 7. If the total is more than $10,000, there is a presumption of abuse. You will have the opportunity to include additional necessary expenses that reduce your monthly income.

If the total disposable income for the five year period falls between $6000 and $10,000, then a third analysis applies. Here, your expected disposable income over the next five years—that number between $6000 and $10,000—is compared to the total of your non-priority unsecured debts.

If your disposable income is less than 25% of the total of those debts, the presumption does not arise. In this case, also, you will have the opportunity to show special circumstances that justify the inclusion of additional expenses.

In short, the means test works like this:

  1. Compare your monthly income to the state median:

    1. If your income is at or below the state median, the presumption does not arise and you “pass” the means test;
    2. If your income is above the state median, go on to calculate your disposable income for the upcoming five year period.
  2. Calculate your disposable income over the upcoming five years:

    1. If that number is below $6000, the presumption does not arise and you “pass” the means test;
    2. If that number is above $10,000, the presumption does arise, and you can file under Chapter 7 only with a showing of special circumstances;
    3. If that number is between $6000 and $10,000, calculate 25% of your outstanding unsecured, non-priority debts.
  3. Multiply your outstanding unsecured, non-priority debts by .25:

    1. If your disposable income over the next five years (as calculated in step 2) is greater than 25% of your unsecured, non-priority debts, the presumption arises and you can file under Chapter 7 only with a showing of special circumstances;
    2. If your disposable income over the next five years (as calculated in step 2) is less than 25% of your unsecured, non-priority debts, you “pass” the means test and can file under Chapter 7.

Be aware, however, that even if you’ve “passed” the means test, the trustee can still raise the issue of abuse if circumstances of a particular case warrant it. Your bankruptcy attorney will be able to tell you what sort of circumstances might trigger a challenge from the trustee.

The purpose of the means test is to figure out whether you have enough disposable income, after subtracting certain allowed expenses and required debt payments, to repay at least a portion of your unsecured debts over a five-year repayment period.

To find out whether you pass the means test, you start with your "current monthly income," calculated as described above. From that amount, you subtract both of the following:

  • certain allowed expenses, in amounts set by the IRS . Generally, you cannot subtract what you actually spend for things like transportation, food, clothing, and so on; instead, you have to use the limits the IRS imposes, which may be lower than what you actually spend.
  • monthly payments you will have to make on secured and priority debts. Secured debts are those for which the creditor is entitled to seize property if you don't pay (such as a mortgage or car loan); priority debts are obligations that the law deems to be so important that they are entitled to jump to the head of the repayment line. Typical priority debts include child support, alimony, tax debts, and wages owed to employees.

If your total monthly disposable income after subtracting these amounts is less than $100, you pass the means test, and will be allowed to file for Chapter 7. If your total remaining monthly disposable income is more than $166.66, you have not passed the means test, and will be prohibited from using Chapter 7 and can only file a Chapter 13, with one exception: If you can prove to the court that you're facing special circumstances that aren't reflected in the calculations above, and that effectively decrease your income or increase your expenses to bring your disposable income below the $166.66 figure, you will be allowed to use Chapter 7.  

If your remaining monthly disposable income is between $100 and $166.66, you must figure out whether what you have left over is enough to pay more than 25% of your unsecured, non-priority debts (such as credit card bills, student loans, medical bills, and so on) over a five-year period. If so, you flunk the means test, and Chapter 7 won't be available to you. (Again, if you are facing special circumstances that alter these figures, you may be able to convince the court to allow you to use Chapter 7.) If not, you pass the means test, and Chapter 7 remains an option.

 

 Contact me, bankruptcy attorney Walter Metzen to learn more about how I can help you get a Fresh Financial Start!.

 Be sure to Obtain a copy of your Credit Report after your Michigan Bankruptcy Filing and check it for Mistakes.

 

 
 

Contact me, bankruptcy attorney Walter Metzen to learn more about how the new Chapter 7 bankruptcy law may affect your case. I offer a free initial consultation so we can discuss your case personally.

We are a Debt Relief Agency helping people file for bankruptcy relief under the Bankruptcy Code. Let us help you decide if bankruptcy is right for you.

Bankruptcy attorney Walter Metzen represents clients throughout Southeast Michigan, including the communities of Detroit, Southfield, Warren, Roseville, Farmington Hills, Ann Arbor, Belleville, Canton, Clinton Township, Dearborn, Dearborn Heights, Hamtramck, Highland Park, Holland, Howell, Lincoln Park, Livonia, Macomb, Northville, Plymouth, Port Huron, Redford, Rochester, Saginaw, Southfield, Sterling Heights, Taylor, Trenton, Troy, Westland, Wyandotte, Ypsilanti, Mount Clemens, Howell, Oakland County, Macomb County, Wayne County, Washtenaw County, Livingston County, and all of the surrounding areas.
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