What Is the Significance of the Chapter 13 Means Test?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced what is known as the “bankruptcy means test,” a method for determining one’s monthly disposable income and ability to pay back creditors. In a Chapter 7 case, the means test establishes one’s eligibility to file Chapter 7 and receive a Chapter 7 discharge; that is, a person who wants to file Chapter 7 bankruptcy must pass the Chapter 7 means test. In Chapter 13 bankruptcy, on the other hand, the means test has nothing to do with one’s eligibility to file Chapter 13; rather, the means test affects the Chapter 13 repayment plan.

When the annualized gross income on the Chapter 13 means test exceeds the median income for the applicable household size, the debtor(s) must file a 60-month repayment plan, unless they can pay off all debts — including all unsecured debts — in less than 60 months. When the annualized gross income on the Chapter 13 means test is less than the median income for the applicable household size, however, the debtor(s) can choose to file a 36-month repayment plan if it suits their needs. An experienced Washington DC or Maryland bankruptcy attorney can help you determine what length your Chapter 13 repayment plan needs to be.

Additionally, the Chapter 13 means test calculates how much monthly disposable income is theoretically available for unsecured creditors. The means test starts by looking at the average gross income received during the six months preceding the bankruptcy filing. Debtors must reflect almost all sources of income, including wages, overtime pay, alimony, child support and unemployment compensation, to name a few — one exception is Social Security income. If the annualized gross income on the means test is less than the median income for the applicable household size, bankruptcy law presumes that the debtor(s) cannot afford to pay back unsecured creditors. If the annualized gross income on the means test exceeds the median income for the applicable household size, however, then the debtor can deduct allowed expenses from the monthly gross income to determine how much monthly disposable income is available for unsecured creditors. Debtors are limited to the IRS standard for certain expenses, but they can deduct their actual expenditures for certain other expenses. A knowledgeable Maryland or Washington DC bankruptcy attorney can help you complete the complicated Chapter 13 means test form.

In June 2010, the U.S. Supreme Court issued a ruling about the Chapter 13 means test and how bankruptcy trustees should use it. In Jan Hamilton, Trustee v. Stephanie Kay Lanning, the Supreme Court ruled that bankruptcy trustees should take a forward-looking approach when determining a debtor. In Chapter 13 bankruptcy, on the other hand, the means test has nothing to do with one’s eligibility to file Chapter 13; rather, the means test affects the Chapter 13 repayment plan.s disposable income, using the Chapter 13 means test as a starting point. In the Lanning case, the debtor received a one-time buyout payment from her former employer during the six months before she filed her case. The bankruptcy trustee wanted to include the buyout payment when calculating the debtor’s disposable income and plan payment, even though the debtor would not be receiving any more buyout payments in the future. However, the Supreme Court held that known changes to a debtor’s future income or expenses should be taken into account when determining what the debtor can afford to pay. This important ruling prevents the court from forcing debtors into unaffordable repayment plans based on income they will no longer receive or expenses that were lower when they originally filed their cases.

If you are considering Chapter 13 bankruptcy, contact an experienced Washington DC or Maryland bankruptcy lawyer today. A qualified Maryland or Washington DC bankruptcy lawyer can assist you with all aspects of the Chapter 13 process, including the means test.

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