In its current form, the Chapter 7 Statement of Your Current Monthly Income (Official Form 122A-1), or “Means Test” was one of the major changes to the Bankruptcy Code enacted under the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). This aspect of BAPCPA was touted as a major step in preventing abuse of the bankruptcy system and was intended to force Debtors who could afford to pay back some amount of their debt to file Chapter 13. Although the Means Test has added several extra layers to the bankruptcy filing process, its overall restrictive impact has been limited. This is the first in a series of posts that will examine the Means Test beginning with this general overview.
In conjunction with Median Income data by family size, the Means Test serves as a gatekeeper for those looking to file for Chapter 7 bankruptcy protection. The essential function of the Means Test is to determine a debtor's current monthly income as compared to the median annual income for that debtor's family size. The median income data is state specific. As an example, Maryland's current median annual gross family income for a family of 4 is $128,272. These median amounts are updated periodically.
The way that the Means Test determines a debtor's annual household income is by taking the average of all income (to be discussed in later posts) for the six month period before filing for bankruptcy and getting a six month average. It then takes that average and multiplies it by 12 to get the annual amount. If that annual amount is below the median family income level for the debtor's family size in the debtor's state, that debtor is eligible to file for Chapter 7. There are other potential hurdles, which vary by jurisdiction, but the Means Test is the first major hurdle.
In contrast, if the annual income number exceeds the median income for the debtor's family size in the debtor's state, a presumption of abuse is said to arise. A presumption of abuse can be rebutted (eliminated) by asserting that the previous six months of income does not reflect future income or by completing the Means Test Calculation on Official Form 122A-2 (also to be discussed in future posts). Essentially, Official Form 122A-2 deducts allowed expenses and certain permitted actual expenses from gross income to determine eligibility for filing Chapter 7.
As you can probably guess from this brief article, if your annual income exceeds the median income level for your family size in your state, each next step of the Means Test adds complexity to your filing. That is why, if you are thinking about filing for bankruptcy protection, you should consult an experienced bankruptcy attorney to assist you with the filing. In the next post, we will examine the different categories of income on the Means Test and how they are calculated.