Bankruptcy Basics: The Means Test

Source: Link to Form B 122A-2 Chapter 7 Means Test Calculation

“Do I make too much money to file bankruptcy?” is a  common question I get from potential clients. The short answer is no, but earning too much may prevent you from filing under Chapter 7. A debtor who earns more than the state’s median income may need to file under another Chapter such as 11 or 13 or simply forgo filing Chapter 7. Right now, according the U.S. Trustee’s Office, which oversees the bankruptcy program, the median income for a family of two in Maine is $54,701; a family of four raises the median income to $78,270. This roadblock to filing Chapter 7 is called the means test.

Prior to 2005, when the means test was enacted, debtors could file Chapter 7 so long as it was not an “abuse” of the bankruptcy process. Abuse was normally found where a debtor filed for Chapter 7 but who could pay all or most of their debts within a reasonable time. As you can imagine, determining which cases were abusive was not easy. So in 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (or BAPCPA). Congress was not satisfied with the rather loose-y goose-y “abuse standard” and so it introduced a more mechanical test to weed out consumer debtors who could afford to pay something to creditors from filing under Chapter 7. Failure to pass the means test means a presumption of abuse arises and, unless rebutted, will create a bar for the debtor to file under Chapter 7.

The means test has come under a great deal of criticism from many quarters. First, it only applies to individuals with consumer debts and not businesses or individuals with mostly business debts. Second, the earnings used to compute the means test is the last six month’s income, which can be gamed by smart debtors or debtors’ counsel. Third, the computation is complicated and time-consuming which means it drives up the cost to file bankruptcy. Adding to the confusion is the fact that Congress applied the means test to Chapter 13, where it serves another purpose. In Chapter 13, the means test is used to determine the length of the debtor’s repayment plan and how much needs to be paid monthly. So it is easy to see why the means test is despised by bankruptcy attorneys.

The means test is a barrier to filing Chapter 7, to be sure, but that does not mean that if you earn too much that you are barred from doing so. Experienced counsel can help you navigate the form and determine if you are eligible to file Chapter 7. If not, through appropriate planning you may be able to qualify at a later date.

If you are not familiar with how bankruptcy operates then I suggest reading my prior post on the various chapters that make up bankruptcy.