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Understanding the Means Test and
Median Income Level Under New Bankruptcy Laws

means test for bankruptcy

On October 17, 2005 the bankruptcy laws went through major changes.  It now requires that  an analysis under new "means test." The means test prerequisite is really a  way to prevent people that are making a “good” income from wiping out  all their debt in a Chapter 7 Bankruptcy.  In Chapter 7 Bankrutpcy debtors wipe out just about any debts, so the means test take some of the debtors and force them to file Chapter 13 Bankrutpcy and then they have to pay back a percentage in a Chapter 13 Bankrutpcy. In other words the court uses the means test to determine if a debtor is eligible for chapter 7 or has to file a Chapter 13 bankruptcy.

In most cases in a Chapter 7 bankruptcy, unsecured debts are discharged in full and a debtor entitled to a fresh start without debts.  A Chapter 13 is different because the debtor winds up paying back a portion of the debt over a 3-5 year period. For an over median income debtor a five year or 60 month plan is typical, however it could be a short as 36 months.

Before the "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," chapter 13 was generally used to save a house or protect equity in other property when the equity was over the debtor's exemptions. Now, the new rules may require a person into a chapter 13 even if they do not have any  equity at all.

Step 1:  Look to the Median Income Levels In the State of Residence

The first step in the analyzing a bankruptcy case under the new law is to look at the debtor's household income and compare it to the median income levels in that area. You are required to use the debtor's prior 6 month income before the filing of the bankruptcy and double it. For example, the median annual income for a 2 people household in New Jersey is $71,744. The median income level chart below is used to list the various states median income.  As you notice, I the limit depend on the family size.

(Cases Filed On and After November 15, 2013)

 

 .   FAMILY SIZE
STATE 1 EARNER 2 PEOPLE 3 PEOPLE 4 PEOPLE *
         
Alabama $39,768 $48,770 $51,621 $66,434
Alaska $53,489 $76,118 $82,377 $85,581
Arizona $41,993 $55,022 $56,503 $64,604
Arkansas $37,081 $46,495 $50,755 $58,333
California $47,798 $62,009 $66,618 $75,111
Colorado $50,242 $65,701 $71,138 $83,330
Connecticut $60,403 $72,761 $86,254 $104,670
Delaware $51,711 $62,350 $68,439 $85,806
District of Columbia $45,793 $89,233 $89,233 $101,582
Florida $41,334 $51,839 $53,952 $63,196
Georgia $40,631 $52,610 $55,829 $68,085
Hawaii $52,975 $65,708 $80,618 $83,538
Idaho $40,303 $51,105 $52,366 $59,971
Illinois $47,536 $61,253 $70,014 $81,680
Indiana $41,250 $51,926 $61,021 $71,113
Iowa $42,346 $58,057 $64,027 $76,173
Kansas $43,793 $57,502 $65,394 $72,453
Kentucky $40,633 $47,788 $53,639 $67,839
Louisiana $38,639 $49,078 $53,768 $68,890
Maine $40,560 $53,979 $61,702 $72,841
Maryland $58,202 $75,992 $86,655 $105,685
Massachusetts $55,794 $69,569 $84,269 $105,299
Michigan $44,072 $52,540 $61,110 $74,863
Minnesota $48,876 $64,454 $77,579 $90,945
Mississippi $35,306 $44,149 $44,149 $51,140
Missouri $40,994 $51,421 $57,468 $72,230
Montana $40,419 $55,715 $60,107 $69,954
Nebraska $41,866 $59,564 $61,380 $73,402
Nevada $41,054 $55,349 $55,349 $61,732
New Hampshire $52,588 $67,408 $82,656 $97,499
New Jersey $60,317 $70,150 $85,575 $103,946
New Mexico $38,914 $49,538 $50,548 $55,184
New York $47,414 $59,631 $70,151 $83,614
North Carolina $40,736 $51,662 $55,049 $66,147
North Dakota $44,098 $61,172 $72,041 $87,154
Ohio $43,057 $53,075 $60,679 $76,381
Oklahoma $39,749 $51,097 $55,641 $64,916
Oregon $44,779 $55,568 $60,693 $70,812
Pennsylvania $47,119 $55,872 $70,092 $81,961
Rhode Island $48,651 $61,510 $74,720 $91,592
South Carolina $39,301 $48,891 $54,010 $62,490
South Dakota $39,040 $56,899 $60,259 $75,267
Tennessee $39,759 $48,053 $56,042 $62,805
Texas $41,354 $56,296 $59,567 $68,566
Utah $49,347 $57,734 $65,311 $70,176
Vermont $43,772 $60,346 $67,388 $79,128
Virginia $51,817 $65,510 $75,774 $90,945
Washington $52,996 $63,409 $72,286 $84,970
West Virginia $42,415 $45,284 $54,229 $65,442
Wisconsin $43,958 $57,903 $67,808 $80,198
Wyoming $51,116 $65,237 $70,319 $76,120
         

* Add $8,100 for each individual in excess of 4.

 

If the family income is below the median income level for that state, then Chapter 7 bankruptcy remains available and there is really no need to complete the  means test.

Step 2: If the Family Income Is Over the Median Income Level, then the Debtor Must Complete the Means Test

In the event your income is above the state median income, you may still be able to qualify to do bankruptcy by further qualification under the means test. This section of the means test takes into account your gross income, and then allows you to deduct expenses based upon standard IRS allowances.

In completing the means test, you have to deduct the living expenses (as permitted by the National Standards) subtract it from the income of the debtor. If there are funds remaining, you multiply that number by 60 months and this is what goes into the chapter 13 plan and it is what the debtor must pay to unsecured creditors. This amount may be anywhere from a very low percentage, say 5% and upwards to 100%. It all depends on how much money is left over after the analysis. Most deductions are found in the National Standards, however, certain deductions, such as the exact amount of mortgage payments or other certain expenses, can be deducted regardless of the IRS guidelines.

If after completing the means test and nothing is left over after then the debtor is still eligible for a chapter 7 bankruptcy and will be able to wipe out just about all of their debts.

Business owners: If you operate a business, or are otherwise a 1099 independent contractor, you may be able to deduct expenses from your gross in order to establish your income for the means test calculation.

 

 



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