The New Bankruptcy Law "Means Test" Explained in Plain English

The New Bankruptcy Law "Means Test" Explained in Plain English

With the new bankruptcy law in effect since October 17, 2005, there is a lot of confusion with regard to the new "means test" requirement. The means test is used by the courts to determine eligibility for Chapter 13 Bankruptcy. The purpose of this article is to explain in plain language how the means test works, so that consumers can get a better idea of how they will be affected under the new rules.

When most people think of bankruptcy, they think in terms of Chapter 13 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," the most common reason for someone to file under Chapter 13 Bankruptcy), and multiplies that figure times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations.

If the income available for debt repayment over that 5-year period is ,000 or more, then Chapter 13 Bankruptcy-law-info.com. Be sure to account for your spouse's income if you are a two-income family. Next, deduct your average monthly living expenses from your monthly income and multiply by 60. If the result is above ,000, you're stuck with Chapter 13. If the result is below ,000, you may still be able to file Chapter 7. If the result is between ,000 and ,000, compare it to 25% of your debt. Above 25%, you're looking at Chapter 13 for sure.

Now, in these examples, I have ignored a very important aspect of the new bankruptcy law. As stated above, the amount of monthly income available toward debt repayment is determined by subtracting living expenses from income. However, the figures used by the court for living expenses are NOT your actual documented living expenses, but rather the schedules used by the IRS in the collection of taxes.

A big problem here for most consumers is that their household budgets will not reflect the harsh reality of the IRS approved numbers. So even if you think you are "safe," and are able to file Chapter 7 because you don't have 0 per month to spare, the court may rule otherwise and still force you into Chapter 13. Some of your actual expenses may be disallowed.

What remains to be seen is how the courts will handle cases where the cost of mortgages or home rentals are inflated well above the government schedules. Will debtors be expected to move into cheaper housing to meet the court's required schedule for living expenses? No one has any answers to these questions yet. It will be up to the courts to interpret the new law in practice as cases proceed through the system.

Thanks To : Is Bankruptcy Right For You?