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