Filing a Chapter 7 bankruptcy to escape unmanageable debt became more difficult in Maryland and around the country when President George W. Bush signed the Bankruptcy Abuse Prevention and Consumer Protection Act into law in 2005. Congress passed this law to prevent abuse of the nation’s bankruptcy code, which is why one of its provisions introduced the Chapter 7 means test. This test is designed to determine whether individuals who file Chapter 7 bankruptcies have enough disposable income to repay at least some of their debts.
The Chapter 7 means test
The Chapter 7 bankruptcy means test has two parts. During the first part of the test, a bankruptcy filer’s income is compared to the median income in the state where they reside. The U.S. Department of Justice maintains a database of the median incomes in all states. Only income that bankruptcy filers earn in the six months before they take the means test is used to perform the calculation, so filers who lost their jobs before pursuing bankruptcy will find it easier to pass the means test than filers who received recent pay increases.
Income and expenses
When individuals who want to file Chapter 7 bankruptcies earn more than their state’s median income, their allowable expenses are taken into consideration. Allowable expenses include rent, utilities, medical expenses and groceries. The dollar figures used when these expenses are considered are based on local and national standards maintained by the IRS and not bills submitted by bankruptcy filers. Most bankruptcy filers fear the Chapter 7 means test, but the figures suggest that they have little to worry about. More than 90% of the people who take the bankruptcy means test pass it, and more than 80% of them pass it at the first stage.
Little to fear
The Chapter 7 means test was introduced when the bankruptcy laws were revised in 2005. The test compares a bankruptcy filer’s income with the median income in their home state, and their expenses are considered if they earn more than their state’s median wage. Most bankruptcy filers fear the means test, but almost all of them pass it.
