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Ultimate Guide To The Bankruptcy Means Test

Bankruptcy Means Test

And How You can Pass!

What is the bankruptcy means test?

Does it even matter? Why should you care?

The bankruptcy means test was designed to determine whether you can file under chapter 7 or chapter 13 of the bankruptcy code, and if a chapter 13 is filed to calculate how much your unsecured creditors will receive.

The bankruptcy means test is intended for this purpose but does it actually do this?

Answer: (Beware….. legalese coming) It will depend.

If, and this is a big IF, you take the mechanical approach which most Cincinnati bankruptcy lawyers do then the test works as intended.

In some cases.

If you have an experienced bankruptcy lawyer in Cincinnati then this professional may know legal ways to manipulate the results of the means test, so that you pass it and are eligible for either chapter 7 or chapter 13 which allows you to pay unsecured creditors nothing.

The Basics of the Means Test

First off you need to understand when the means test will apply, and when it won’t.

Your current income and family size is the first consideration. This means that 99% of the Cincinnati bankruptcy attorney websites on the internet that have information on the means test are irrelevant because few if any of these sites update their figures.

Instead visit http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm to get the most current figures for the state that you live in.

Simply figuring the correct family size that you have can be a feat in itself. Are there any children of parents who are divorced? Do you share parenting with the other parent? Beware….. more legalese coming. Once again the answer depends.

The bankruptcy law is a federal code, however the application of this code can depend on the state where you live, and even be different in different parts of the same state. In Cincinnati and other areas of Ohio a child can be claimed by either parent for the means test. Parents who are divorced can both claim the same child for the purpose of the means test if each parent files for bankruptcy.

What happens when your income is lower than the median income?

You will stop, it is not necessary to go any further. You have finished, and you do not have to use the means test.

What happens when your income is higher than the median income?

This means that you need to continue into the complicated means test, which can seem like a fantasy world at times.

This is the step where I see countless bankruptcy attorneys try to take short cuts when analyzing your situation, and this can be a bad idea which could be costly.

I have had many consultations where people just wanted an opinion. These people tell me that they “consulted with a bankruptcy lawyer in Cincinnati who told them that they must file chapter 13 because their income was higher than the median income.”

I explain to these potential clients that this is not necessarily true. The Cincinnati bankruptcy attorney was either misinformed of the law, they were too lazy to do the proper research and analysis, or they are hoping to earn a bigger fee for the chapter 13 filing than they would earn for a chapter 7 bankruptcy. This may sound critical but I have to call things like I see them, and in my long term professional experience these are some of the factors which guide this common bankruptcy mistake.

If you income is above the median then this simply means you must keep going, and go through a long and complex math question in order to calculate whether the means test is pass or fail in your situation.

Passing the means test just means that it may be possible for you to file under chapter 7 of the bankruptcy code.

Possible? Yes.

Guaranteed? No!

Passing the means test does not mean automatically qualifying under the chapter 7 bankruptcy laws.

You may pass the means test yet fail another more subjective test, one that determines the ability that you have to repay your debts. An experienced and qualified bankruptcy attorney in Cincinnati can help determine the outcome of this test.

The answer will depend on whether your income and situation will allow you to pay back a meaningful amount on your debt, not just a few cents on the dollar or 1% of your debt. This test looks at the actual income that you have and calculates a livable budget based on your specific income and expenses.

With a chapter 13 filing there is no pass or fail for the bankruptcy means test. A different formula is used and the calculation results serve a different purpose. This formula determines the exact amount that you would need to pay to all unsecured creditors that you have. Some Cincinnati bankruptcy lawyers get results from this calculation which are either wrong or completely unrealistic.

The bankruptcy courts realize this and understand that there may be extenuating circumstances. Various courts may use a variety of approaches in order to get a result which is appropriate, one that actually makes sense based on the situation.

One example involves using the average of your last 6 months of income before you file for bankruptcy. A knowledgeable bankruptcy lawyer in Cincinnati may realize that the income you had during that period is not the same as the income that you currently have, or what your income will be in the future.

In this situation the means test calculation result will not mean anything. Instead the court will consider your expected income and use some common sense in their approach when determining what you should pay your unsecured creditors.

Magic with the means test.

You can fail the calculations and still pass the means test at times. There are legal ways to make changes and get better results from this calculation. If you are starting your yearly tax preparation there are legal steps that you can take to lower the tax amount that you end up owing.

If you are preparing to file for bankruptcy protection then there are also things that can be done to improve your means test results. Once again these steps are all legal and completely above board, no shady practices, and they can manipulate the test outcome so that you do qualify for chapter 7 or have to pay less to your unsecured creditors in a chapter 13.

Many unsecured creditors gripe about these legal maneuvers but the fact is that the bankruptcy code and system is intended to give consumers who need it a fresh financial start. The laws allow for certain things which can mean a better outcome and better results for the consumer in need. I feel that a bankruptcy lawyer in Cincinnati has a mandatory obligation to give their client the best possible advice about improving the means test results, and helping them achieve the best outcome from their bankruptcy case.

With a chapter 7 bankruptcy case you can take certain deductions which may improve your results and ensure that you pass the means test. An automobile payment is one of the deductions that you are allowed. So if you have an old vehicle which is always breaking down but is fully paid for you could be penalized.

If you purchase a new vehicle before you file your bankruptcy case then the payments that you owe can be deducted from your income, often making the difference between passing and failing the means test. This payment means that there is less income available to pay off unsecured creditors, if there is anything left after expenses at all. Means test magic. The new payment means you pass when you would have failed if you kept the old vehicle and did not have the monthly payment.

Creditors complain that this is not fair, and that the consumer gets a new vehicle while the creditor gets little or nothing. In a way this is very true, but the consumer should not be penalized while the unsecured creditor reaps rewards because the consumer has a vehicle that may be unsafe and is clearly ready to be replaced. After all, without a safe and operational vehicle how long would you be able to continue working and earning an income?

With a chapter 13 bankruptcy case you may have income available to pay creditors, but have an older car that really needs to be replaced because it costs more for repairs than it is worth or it is unsafe in some way. Replacing the vehicle is a legitimate need, and the right bankruptcy lawyer in Cincinnati will understand this.

With the additional expense of an auto payment each month the excess income that would have been used to pay your creditors is now used for a legitimate expense. Under chapter 13 you will also usually see the interest rate that you pay change as well, often going from a very high rate down to around 4.75% instead in many cases.

A common practice for consumers who are considering a chapter 13 filing is to replace one, sometimes even two, vehicles before they file their case. The extra income they previously had to pay off unsecured creditors is now used for auto payments, and these deductions can drastically reduce the amount the creditors are entitled to.

This is legally allowed, and is considered a necessity even though the consumer benefits because you need a safe and running vehicle to get back and forth to work so that chapter 13 bankruptcy plan can be successfully completed. A competent and experienced Cincinnati bankruptcy attorney can advise you on the best way to proceed so that you get the maximum benefit from your bankruptcy.

What is Your interest in the means test?

Many people that I consult with want to know about the means test because they want to file for chapter 7 rather than chapter 13. These potential clients presume that filing for bankruptcy under chapter 7 of the bankruptcy code is a better option than filing under chapter 13, but this is not necessarily true.

The idea of paying nothing may seem better than paying something, and this idea does have a superficial attraction. However as a bankruptcy lawyer in Cincinnati with over 30 years of experience I can tell you that a chapter 7 case may not always be the ideal way to resolve your financial problems.

Even if you qualify for a chapter 7 case you could be better off filing for chapter 13 bankruptcy instead. Chapter 13 allows you to do things which would not be possible under chapter 7 when you have the right Cincinnati bankruptcy lawyer.

For example: You qualify for a chapter 7 bankruptcy and want to keep a $20,000 automobile. You are paying $526 each month and have an interest rate which is 24.99%. With 6 year financing you will end up shelling out $17, 910 in interest alone on this debt.

I can work with you to take the same vehicle in a chapter 13 case and pay it off in 5 years, with a monthly payment of only $375. Under chapter 13 bankruptcy you would save $15,402 in interest and still keep the car. Wouldn’t this be a better plan? Would you be better off filing for chapter 7? Probably not.

Gotchas with the means test.

Even if you pass the means test for chapter 7 bankruptcy or this test does not apply you must still pass the substantial abuse test. As a bankruptcy lawyer in Cincinnati I have found that the means test often leads to unexpected problems or even results that are outrageous and ridiculous.

I have had personal experience and have filed cases after extensive pre-bankruptcy filing where a client earned over $100,000 a year and still qualified for a chapter 7 bankruptcy. The filing was approved without any hesitation by the court.

Other cases I have handled as a bankruptcy attorney in Cincinnati involved people who have had very limited income yet were forced by the United States Trustee’s Office to file under chapter 13 of the bankruptcy code in spite of the fact that the unsecured creditors received less than 5 cents on every dollar owed.

This may seem strange but it is true!

Even if you successfully pass the means test you must still pass the substantial abuse test. The United States Trustee’s Office is allowed to disapprove a chapter 7 bankruptcy filing under 11 USC sections 707 (b)(3) even if your means test was passed.

Why can’t I use chapter 7 if I pass the means test?

A qualified Cincinnati bankruptcy lawyer understands that passing the means test is not the end of the equation. In theory if you have sufficient income left over each month after paying your living expenses then you could provide a meaningful payment amount to unsecured creditors that you owe. This situation can come up in many ways, and it usually means that you must file under chapter 13 instead of chapter 7.

The only way that you can be sure you are picking the best possible options for the debt relief that you need is to pick an experienced and highly knowledgeable bankruptcy attorney in Cincinnati. Now is not the time to try and represent yourself because ethe bankruptcy code is very complicated and highly complex.

What if you can’t pass the means test and you need to file for bankruptcy?

This question is a trick question!

In the many bankruptcy cases that I have filed for clients over the years I have found that you do not need to try and evade, get around, or avoid the means test. You want a financial recovery, and you can achieve this with both a chapter 7 and a chapter 13 bankruptcy case.

Some of my clients who qualify under chapter 7 are better off if they file under chapter 13 instead. I have had clients who filed under chapter 13 and still did not have to pay anything to unsecured creditors. Chapter 13 can also offer many benefits that are not available or allowed in chapter 7.

A means test may not even be necessary!

Even if you are currently required to do a means test you may be able to make some changes which could make this test unnecessary in a month or two. This is also true if there are things going on that could change your financial situation in the near future. A good bankruptcy lawyer in Cincinnati may advise you to wait a few months before filing so that the means test is not required.

If you do need to pass the means test there are some changes that you can make which will allow you to do so in the near future. If the means test is required and you can not file for chapter 7 this is not the end of the world though. Chapter 13 may allow you to do some things that mean you will pay little, if any, extra money to the unsecured creditors that you owe. One way to do this is to replace an old vehicle which is constantly needing costly repairs with one that is safe and reliable.

At the risk of sounding like a lawyer what is best for you depends on what you truly need, and this is not always exactly what you think you need. A one size fits all analysis is not possible, and the focus needs to be on finding the best solution for your financial and debt problems instead of a universal goal of trying to get around the means test.

As a bankruptcy lawyer in Cincinnati with more than 3 decades of experience I have found that chapter 7 is not always the best solution for a financial recovery, even with clients who qualified for this type of case. This type of case is not the holy grail of debt relief that many consumers believe it to be.

You need a Cincinnati bankruptcy attorney and debt counselor to look at your personal situation, your financial goals, and your needs so that you get the best possible results.

There is no need to sweat it over the means test, this test is not the big problem that most think it is. The best bankruptcy lawyer in Cincinnati can help you determine the right solution for your unique situation, and explain why this plan is the best one for your financial recovery.

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