Chapter 7 bankruptcy is the liquidation of your assets in return for having your debts pardoned. Chapter 13 bankruptcy lets you work with the court to find a way to pay off your debts. In order to prevent people from abusing Chapter 7 proceedings when they could be paying off their debts through Chapter 13, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 created the means test.
The means test uses a series of calculations and deductions to determine if a person is abusing the Chapter 7 bankruptcy system. The monthly income of the debtor over a five year period has to be less than either $10,000 or whichever is greater between 25% of the unsecured debt owed and $6,000.
The math for the equation is simple enough: take your current monthly earnings, reduce it by the various amounts provided by the law, and multiply by 60 months. If it is lower than one of the amounts listed above, then you can proceed with a Chapter 7 bankruptcy. If it is greater than those amounts, the court will convert your case into either a Chapter 11 or a Chapter 13 bankruptcy.
The deductions are as follows:
- Living expenses listed under the National Standards and Local Standards
- Reasonably necessary expenses incurred to maintain the safety of the debtor and the family of the debtor from family violence.
- Administrative expenses of a Chapter 13 plan
- Reasonably necessary health insurance
- Disability insurance
- Health savings account expenses for the debtor and their family
- Reasonable and necessary expenses for care and support of an elderly, chronically ill, or disabled member of the debtor’s family
- Actual expenses for each dependent child, not to exceed $1,500 per year per child, to attend school. This requires documentation and a detailed explanation for why such expenses are reasonable and necessary, and why they are not already accounted for in the National Standards
- An allowance for housing and utilities if it can be demonstrated that the costs are reasonable and necessary
- The amount due to secured creditors over five years plus the amount required to pay off housing and automobile creditors over five years, all divided by 60
- The amount due to pay off priority claims such as child support and alimony over the next five years, divided by 60
The presumption of abuse can be rebutted by demonstrating special circumstances, such as a serious medical condition or a call to active duty in the Armed Forces, so far as the circumstances justify additional expenses. To do this, you will need to provide documentation for the expenses and a detailed explanation as to why these additional expenses are reasonable.
Dustin Bower is the founder and owner of Bower Law Office, PLLC, http://www.bowerlawoffice.com. Dustin has experience in a wide range of legal areas, including bankruptcy, child welfare and advocacy, administrative law, criminal law, unemployment law, corporate law, and business litigation.
