Chapter 7 Bankruptcy
For many years before the Bankruptcy Code was amended, Chapter 7 Bankruptcy
laws were interepreted somewhat loosely. As a result, bankruptcies were
sometimes administered in an inconsistent manner, relying largely on personal
discretion. Under the old laws, two debtors with similiar situations might
find themselves with different outcomes. In order to create a more objective
standard for determining one's qualification for Chapter 7 Bankruptcy,
Congress passed the
Bankruptcy Protection Act of 2005, in turn creating the
What is the Means-Test?
In summary, the Bankruptcy Means-Test is a two part test designed to determine
whether a debtor is a suitable candidate for a
Chapter 7 Bankruptcy (also known as an "asset liquidation").
In part one of the Bankruptcy Means-Test, the debtor will compete an income
calculation. The debtor must submit their average monthly income for the
6 months prior to filing for bankruptcy. If their average monthly income
for their household is less than or equal to the median household income
for their state they will qualify under the Bankruptcy Means test. Find out the
means-test calculations in your jurisdiction at the U.S. Department of Justice website.
If a debtor fails to meet the requirements of part one, they will have
to partake in the second part of the means-test. In part two, the debtor's
finances will be further examined. If the debt has enough disposable income
to pay some amount towards a Chapter 13 repayment plan after removing
all the allowable deductible expenses, they will not qualify.
Take Note: Even if a debtor passes the Means-Test, it is still possible
that the bankruptcy trustee may further examine the debtor’s financials.
If the Trustee determines that after paying their paying their basic necessities,
the debtor has enough disposable income to pay a chapter 13 repayment
plan, the trustee can submit their findings to the judge. The judge may
decide whether to reject the debtor's request for Chapter 7.
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Special Circumstances and Exemptions to the Means-Test
In many cases, if the Debtor fails the Means-test, the case will either
be dismissed, or converted into a Chapter 13 Bankruptcy. However, the
debtor can oppose the motion to dismiss by attempting to prove they are
a special circumstance. Special circumstances may include recent events
that wouldn't have impacted the debtor's 6 month average household
income. These special circumstances would be recent life changing events
such as unemployment,
development of a serious illness/medical condition, or excessive rent hikes. If the debtor is able to provide documentation
for the special circumstances, and they are able to explain the necessity,
the court could adjust the debtor’s expenses for the means-test
and grant eligibility for Chapter 7.
There are some debts that grant a debtor exemption from having to take
the Bankruptcy Means-Test. If the debts are primarily a result of non-consumer
debt, such as operating a business, the debtor would not be subjected
to the means-test.
Disabled veterans might also qualify for exemption from the Means Test
by meeting certain standards. If the Veteran has a disability rating of
at least 30 percent and at least half their debt was garnered while on
active duty, they may be exempt from the Means-Test.