The New Bankruptcy Law "Means Test" Explained in Plain English

In Laws Problems - The New Bankruptcy Law "Means Test" Explained in Plain English

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With the new bankruptcy law in result since October 17, 2005, there is a lot of confusion with regard to the new "means test" requirement. The means test is used by the courts to decide eligibility for episode 7 or episode 13 bankruptcy. The purpose of this article is to clarify in plain language how the means test works, so that consumers can get a better idea of how they will be affected under the new rules.

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When most citizen think of bankruptcy, they think in terms of episode 7, where unsecured debts are normally discharged in full. Bankruptcy of any variety is a difficult ordeal at best, but at least with episode 7, a debtor was able to wipe out their debts in full and get a fresh start. episode 13, however, is another story, since the debtor must pay back a vital measure of the debt over a 3-5 year period, with 5 years being the accepted under the new law.

Prior to the advent of the "Bankruptcy Abuse arresting and consumer security Act of 2005," the most coarse reckon for person to file under episode 13 was to avoid the loss of equity in their home or other property. And while equity security will continue to be a big reckon for citizen to select episode 13 over episode 7, the new rules will force many citizen to file under episode 13 even if they have No equity. That's because the means test will take into list the debtor's earnings level.

To apply the means test, courts look at the debtor's median earnings for the 6 months prior to filing and collate it to the median earnings for that state. For example, the median every year earnings for a particular wage-earner in California is ,012. If the earnings is below the median, then episode 7 remains open as an option. If the earnings exceeds the median, the remaining parts of the means test comes into play.

This is where it gets a itsybitsy bit trickier. The next step in the calculation takes income, less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that form times 60. This represents the estimate of earnings ready over a 5-year period for refund of the debt obligations.

If the earnings ready for debt refund over that 5-year period is ,000 or more, then episode 13 will be required. In other words, anything earning above the state median, and with at least 6.67 per month of ready income, will automatically be denied episode 7. So for example, if the court determines that you have 0 per month earnings above living expenses, 0 times 60 is ,000. Since ,000 is above ,000, you're stuck with episode 13.

What happens if you are above the median earnings but do Not have at least 6.67 per month to pay toward your debts? Then the final part of the means test is applied. If the ready earnings is less than 0 per month, then episode 7 again becomes an option. If the ready earnings is between 0 and 6.66, then it is measured against the debt as a percentage, with 25% being the benchmark.

In other words, let's say your earnings is above the median, your debt is ,000, and you only have 5 of ready monthly income. We take 5 times 60 months (5 years), which equals ,500 total. Since ,500 is less than 25% of your ,000 debt, episode 7 is still a potential choice for you. If your debt was only ,000, then your ,500 of ready earnings would exceed 25% of your debt and you would be required to file under episode 13.

To sum up, first form out either you are above or below the median earnings for your state - median earnings figures are ready at http://www.new-bankruptcy-law-info.com. Be sure to list for your spouse's earnings if you are a two-income family. Next, deduct your median monthly living expenses from your monthly earnings and multiply by 60. If the result is above ,000, you're stuck with episode 13. If the result is below ,000, you may still be able to file episode 7. If the result is between ,000 and ,000, collate it to 25% of your debt. Above 25%, you're finding at episode 13 for sure.

Now, in these examples, I have ignored a very leading aspect of the new bankruptcy law. As stated above, the estimate of monthly earnings ready toward debt refund is determined by subtracting living expenses from income. However, the figures used by the court for living expenses are Not your actual documented living expenses, but rather the schedules used by the Irs in the variety of taxes.

A big question here for most consumers is that their household budgets will not reflect the harsh reality of the Irs approved numbers. So even if you think you are "safe," and are able to file episode 7 because you don't have 0 per month to spare, the court may rule otherwise and still force you into episode 13. Some of your actual expenses may be disallowed.

What remains to be seen is how the courts will deal with cases where the cost of mortgages or home rentals are inflated well above the government schedules. Will debtors be incredible to move into economy housing to meet the court's required schedule for living expenses? No one has any answers to these questions yet. It will be up to the courts to clarify the new law in custom as cases trek, through the system.

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