The means test will be used by the courts to determine eligibility for Chapter 7 or Chapter 13 bankruptcy. The means test is rather complex but quite generous and most debtors have no trouble meeting its requirements. When most people think of bankruptcy, they think in terms of Chapter 7, where unsecured debts are normally discharged in full. With a Chapter 7, a debtor is able to wipe out most of their debts in full and get a fresh start immediately. In a Chapter 13, the debtor must pay back a portion of the debt over a 3-5 year period, with 5 years being the standard under the new law.
To apply the means test, the courts will look at the debtor's average income for the 6 months prior to filing and compare it to the median family income for that state. For example, the median annual income in New Jersey for a single individual is $56,151, for a two person family, it is $64,821, for a three person family, it is $83,306, for a four person family, it is $97.131. Add $6,900 for each individual in excess of four. If the income is below the median annual income, then Chapter 7 remains open as an option. If the income exceeds the median, the remaining parts of the means test will be applied.
The next step of the means test takes income less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that figure times 60. This result represents the amount of income available over a 5-year period for repayment of the debt obligations. If the income available for debt repayment over that 5-year period is $10,000 or more, then Chapter 13 will be required. In other words, anyone earning above the median family income, and with at least $166.67 per month of available income, will automatically be denied Chapter 7. So for example, if the court determines that the debtor has $200 per month income above living expenses, $200 times 60 is $12,000. Because $12,000 is above $10,000, the debtor will need to file a Chapter 13.
What happens if the debtor is above the median income but does NOT have at least $166.67 per month to pay toward your debts? Then the final part of the means test is applied. If the available income is less than $100 per month, then Chapter 7 again becomes an option. If the available income is between $100 and $166.66, then it is measured against the debt as a percentage, with 25% being the benchmark.
In other words, let us say the debtor's income is above the median, the debt is $50,000, and the debtor only has $125 of available monthly income. We take $125 times 60 months (5 years), which equals $7,500 total. Because $7,500 is less than 25% of the debtor's $50,000 debt, Chapter 7 is still a possible option. If the debtor's debt were only $25,000, then the debtor's $7,500 of available income would exceed 25% of the debtor's debt and the debtor would be required to file under Chapter 13.
Now, in these examples, I have ignored a very important aspect of the new bankruptcy law. As stated above, the amount of monthly income available toward debt repayment 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 collection of taxes.
