In previous blogs, I've said that for 80% of Chapter 7 bankruptcy filers, the 2005 bankruptcy law changes won't alter much in their bankruptcy. (See The New Bankruptcy Law: Little Change for Most Debtors (Other Than Pricier Lawyers).) But that leaves 20% of bankruptcy filers, for whom the new laws will make a difference.
So what separates the 80% from the 20%? Simply stated, with a few rare exceptions, about 20% of people who want to file Chapter 7 bankruptcy have made enough money over the previous six months so as to be required to take what's known under the new law as the means test. To learn more about the Chapter 7 means test, see Nolo's article The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?.
The Means Test: Three Steps
The means test has three steps. The first step is to compute your average gross monthly income from all sources (taxable or not) for the six-month period prior to the month in which you plan to file for bankruptcy.
The second step is to compare that average monthly gross income figure with the median gross income for a similarly sized household in your state. If your income is under the median income figure you've passed the means test (in only two steps).
If your income is over the median income figure you must take a test to determine if you would have enough income left over after your allowable expenses to pay down some of your debt in a Chapter 13 plan. If so, you can be forced in a Chapter 13 bankruptcy (or alternatively, have your case dismissed). If not, you are eligible for Chapter 7 bankruptcy (again, with rare exceptions).
Use a Handy Means Test Calculater
Because of the means test, many people believed it would be harder to file for Chapter 7 bankruptcy -- and if they are in the 20% category they would be right. Still, as it turns out, a majority of people who are forced into taking the means test pass it and are eligible for Chapter 7 bankruptcy. And thanks to Albin Reneauer (my co-author on my bankruptcy books, How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy), an easy to use (dare I say fun) free online calculator helps you determine whether you pass or fail the means test. If you want to find out whether you are in the 80% or 20% category on account of the means test, visit www.legalconsumer.com, punch in your zip code, enter the average gross monthly income figure for your household, and follow the instructions to complete the test.
Oh, one last word on this topic. Nothing in law is as tidy as I've made it here. Even for people who pass the means test, there may be complications in individual cases that make it difficult to do your own bankruptcy, and that might add a percent or two to the group that needs a lawyer. I'll write more about this in future blogs. Stay posted.