In 2005, BAPCPA (Bankruptcy Abuse Prevention and Consumer Protection Act) was passed and it became a law. One of the prime features of this act was the introduction and implementation of a new means test for bankruptcy. The intent of this act, as the name suggests, was to prevent people from abusing bankruptcy law i.e. stop people from using bankruptcy as a method to walk away from debts even when they had means to pay back. At the same time, this law aims to protect the interests of elderly, single mothers and other genuine people.
So, what is a means test for bankruptcy?
A bankruptcy means test, simply put, is a test (or shall we say, a calculation) that is done in order to determine whether the debtor (on whom means test for bankruptcy is being done) has the means to repay his debts and to what extent.
The means test for bankruptcy involves comparing your monthly income with the median monthly income of a similar-sized family in your state… and the second part of course is determining how much disposable income you have (if any) after paying for minimal living expenses. That is the premise on which the means test works.
How is this bankruptcy means test conducted?
Well, you don’t have to sit in some examination hall or anything for this test. You just have to provide the requested information in the relevant bankruptcy form. The debtor has to enter information about his/her income and expenses in the form 22A or 22C… as the case may be. Form 22A is for the purpose of Chapter 7 bankruptcy means test and form 22C is for Chapter 13 bankruptcy means test.
It is also important to note that you must use the right data and parameters for completing your 22A or 22C forms. This is primarily the data (besides your income/expense data) that is provided by Internal Revenue Service (IRS) and Census Bureau. Since this kind of data changes over a period of time, you must use the right time period and accordingly get the data/parameters from the website of Department of Justice.
What could be the result of the bankruptcy means test?
Here it is important to first recall that the bankruptcy means test is primarily applied to check the eligibility for Chapter 7 and Chapter 13 bankruptcies. Note that primary difference between Chapter 7 and Chapter 13 bankruptcy is that while Chapter 7 bankruptcy is used to completely settle/eliminate unsecured debts through selling off the assets not protected by law, Chapter 13 is used to reorganize debts over 3-5 years period as per the means of debtor.
So, Chapter 7 is used by people to immediately get rid of their debts completely. However, means test for bankruptcy could find out that the debtor is indeed capable of repaying his or her debts and hence might dismiss the Chapter 7 bankruptcy application and then the debtor might have to resort to Chapter 13 bankruptcy… or file for bankruptcy under one of the other Chapters of bankruptcy as per their eligibility.
Note: What you judge as minimal living expenses might not be considered as minimal by the courts. So, do not depend entirely on your calculations. In fact, it might be a good idea to take legal advice or consult a reputed professional who can guide you with the means test and help you determine which Chapter to file under.