The bankruptcy means test was implemented in 2005 with the purpose to weed out Chapter 7 debtors who could afford to repay debts in Chapter 13. Someone who files Chapter 7, but can afford to repay debts in a Chapter 13 is said to be “abusing” the system. The means test is a burden shifting device that presumes either an ability or inability to afford a repayment plan. Since the means test only makes a presumption based upon historical evidence (the past six months), the ultimate result may be different.
In order to qualify for a Chapter 7 bankruptcy, the debtor must essentially pass two income tests. The first is the income presumption created by the means test. The debtor’s income is averaged over the past six months (not including social security income). If the debtor’s income is higher than the state median income, the Chapter 7 debtor is presumed to be abusing the system. A second analysis is made of the debtor’s “present day” income. For instance, a debtor who was unemployed for six months prior to the bankruptcy filing may “pass” the means test. However, if this debtor is recently employed with a $150,000 a year job, the Chapter 7 case can still be dismissed for abuse. The means test creates a presumption that the debtor cannot afford to repay debts in a Chapter 13 bankruptcy. However, in actuality the debtor can afford to repay debts because of his present income.
Conversely, a debtor could “fail” the means test because of a high income over the previous six months. However, the debtor’s present income may have suddenly decreased, or the six month average may be artificially inflated because of a one time bonus or other income windfall. The means test result shows the debtor can afford to repay debts during Chapter 13, but the present income qualifies the debtor for Chapter 7. Evidence of current income is presented to the bankruptcy trustee that rebuts the presumption that the debtor can repay during Chapter 13.
“Passing” or “failing” the bankruptcy means test is often a matter of selecting the proper legal entitlements and making the right financial calculations. It is also a matter of looking critically at your present financial condition. Your bankruptcy attorney will help you identify your true past and present incomes and assist you in deciding which bankruptcy chapter best serves your short and long term needs.