Prior to October 17, 2005, consumers who filed for bankruptcy had the choice to file for Chapter 7 or Chapter 13; when the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took effect on October 17, 2005, that choice ceased to exist and consumers now must pass the "means test" in order to file for Chapter 7 bankruptcy protection.

Under the means test, it is presumed Chapter 7 bankruptcy is liable to be abused and therefore not allowed, if the debtor's monthly income, less allowances and living expenses, and multiplied by 60 months (adjusted income), is greater than $10,000. If a debtor's adjusted income is less than $6,000, there is no presumption of abuse, and the debtor is free to choose Chapter 7. If a debtor's adjusted income is between $6,000 and $10,000, abuse is presumed only if the debtor's income exceeds 25% of his/her non-priority, unsecured debt.

The Basics of The Bankruptcy Law Means Test

In 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 income for that state. If it is below the median, then Chapter 7 remains open as an option. If it exceeds the median, the remaining part of the means test will be applied.

The next step in the calculation takes income less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that figure times 60. This corresponds to 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. If it is less than $100 per month, then Chapter 7 again becomes an option. If it is between $100 and $166.66, then it is measured against the debt as a percentage, with 25% being the benchmark.

To sum up, first figure out whether you are above or below the median income for your state - median income figures are available at new-bankruptcy-law-info.com. The incomes of both spouses, if working, should be considered. Next, deduct your average monthly living expenses, as approved by the IRS, from the monthly income and multiply by 60. If the result is above $10,000, you're stuck with Chapter 13. If the result is below $6,000, you may still be able to file Chapter 7. If the result is between $6,000 and $10,000, compare it to 25% of your debt. Above 25%, you're looking at Chapter 13 for sure.

A helpful tip for those seeking to avoid the twists of the bankruptcy law means test. Because the means test is based on wages during the six months prior to filing, some lawyers may have their clients file during a slow period of employment or while they are between jobs. In other words, simply clever timing of the filing of your Chapter 7 case may help you get by the bankruptcy law means test.

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