After the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, it’s now a requirement for any business or individual to undergo a bankruptcy means test before they can decide which type of bankruptcy they can file for. But how does one take the test, why was it created, and what does the test consist of?
Why was the Test Created?
The test was originally created to prevent abuse of the bankruptcy process. In the past, it was simple to just file for Chapter 7 bankruptcy to wipe away any debts from a business or property; and this applied no matter how able or unable the individual filing for bankruptcy was when it came to paying back their debts.
But this is not the case now because if an individual fails the means test then this means that they do have the ability to pay back their debts. This means that they won’t be able to file for Chapter 7 bankruptcy. Instead, they will have to file for Chapter 13 bankruptcy. Chapter 13 bankruptcy advocates a debt restructuring program, which means that the individual filing for bankruptcy would then have to pay back their debts over a specific amount of time.
The Makeup of the Test
The test is made up by using a combination of an individual’s monthly income and the amount of debt they possess. The idea of the test is to determine whether an individual has the ability to pay back their creditor(s) in part, in full, or not at all.
First of all, the debtor’s current monthly income is determined by using the average income of the debtor over the last six months, prior to filing for bankruptcy. This current monthly income then starts as the initial figure which is then subtracted from by using the household monthly expenses of the debtor. The final figure, after this process has been completed, represents the monthly disposable income for the household. If the disposable income figure is quite high then it may be difficult for that individual to file for Chapter 7 bankruptcy because this would be considered to be a high enough monthly disposable income figure to pay back the creditor.
Since this test only applies to consumer debts, the filer is compared with an overall median income level. If the filer falls below the median income level then they are free to file for Chapter 7 bankruptcy, but if the income level of the filer is above that then they will be judged on whether they have enough excess income to pay off the debt. If this is the case then it means that that the filer may have to pay off some of the debt, at least.
It should be noted that the state where bankruptcy is filed for will have a considerable affect on deciding whether the individual can pay back some or all of the debt. And this is because it will depend on the median income of the state as this varies wildly across America.
How to Carry Out the Test
- Any results from online bankruptcy tests should be printed off and presented to the court as part of the information comprising the debtor’s schedule of current income and expenditures.
- The information for the form on the Department of Justice website should then be located. Required information will include things like the median family income for the state the individual lives in and so-called national and local standards.
- The rest of the form should then be filled out with all the information still available at home. The final totals should then all be calculated, before sending the form off.
- Make sure that the decision to file for Chapter 7 bankruptcy or Chapter 13 bankruptcy is made, and then take out either Official Bankruptcy Form 22A (for Chapter 7 bankruptcy) or Official Bankruptcy Form 22C (for Chapter 13 bankruptcy). These forms can both be found on the website for the Department of Justice.
What to Remember
- Since 2005, the law has been structured to encourage individuals and businesses to file under Chapter 13 bankruptcy because this means that the debtor will repay at least some of their debt, whereas Chapter 7 bankruptcy would just discharge all of the debt.
- The means test for people who are filing for Chapter 13 bankruptcy is designed to judge exactly how much the debtor can pay back and the rate at which money can be paid back.
- Before filing for bankruptcy, debtors are advised to think about whether they need to file for bankruptcy. While it may seem easy to file for Chapter 7 bankruptcy and discharge all of the debt, it shouldn’t be taken lightly because bankruptcy will leave a black mark on any credit history; and this means that it can be hard to lend money in the future.