Chapter 7 Bankruptcy & The Means Test
In a Chapter 7 Bankruptcy, the Bankruptcy Trustee acquires all or part of the Debtor’s property and liquidates the Debtor’s non-exempt property. A Debtor is a person who has filed a petition for relief under the Bankruptcy Code. After acquiring all or part of the Debtor's property, the Trustee will then liquidate (sell) the Debtor’s property with proceeds to be used for benefit of Creditors. Unlike Chapter 13 Bankruptcy, the Debtor is not required to repay debts in a repayment plan. Potential Debtors should be aware that the filing a Chapter 7 Bankruptcy may result in the loss of the Debtor’s property.
Who Can Be A Debtor?
In order to file for a Chapter 7 Bankruptcy, the Debtor must meet two requirements: (1) the Debtor must be an individual or an entity and (2) the Debtor must pass the “means test.” Chapter 7 Bankruptcies are only available to: individuals, corporations, partnerships and limited liability companies. After meeting the first requirement for a Chapter 7 Bankruptcy, you must also pass the “means test” in order to file a Chapter 7 Bankruptcy.
What Is The Means Test?
In 2005, Congress added a restriction on the use of Chapter 7 Bankruptcies, called the “means test.” The “means test” is found in Section 707(B) of the Bankruptcy Code. Passing the “means test” means that the debtor does not have the means to make meaningful payments on their debts. If you fail the “means test,” then you have two options: (1) do not file bankruptcy all together or (2) file a Chapter 13 case and pay the debts from future income. On the other hand, if you meet the requirements of the “means test,” you may be eligible to file a Chapter 7 bankruptcy.
How Do You Know If You “Pass” The Means Test?
The first step in determining whether a Debtor passes the “means test” is calculating the Debtor’s Current Monthly Income (CMI). CMI is defined in Section 101 of the Bankruptcy Code. CMI is the number based on a Debtor’s earning history prior to the filing of bankruptcy. After establishing the Debtor’s CMI, the attorney must compare that Debtor’s CMI with what is called the “Median Family Income,” which is an average income of a comparable family size in the geographic region in which the Debtor resides. If the Debtor’s CMI is less than the “Median Family Income” for that region, the Debtor passes the “means test” and can file a Chapter 7 Bankruptcy. However, if the Debtor’s CMI is above the “Median Family Income” for the region, then the Debtor must proceed to step two of the “means test.”
The second step of the “means test” is subtracting the Debtor’s allowable expenses from the Debtor’s CMI. Allowable expenses include things such as housing utilities, transportation expenses, food expenses and clothing expenses. After subtracting the Debtor’s allowable expenses, if the CMI is less than the “Median Family Income,” then the Debtor passes the means test; and, the Debtor may file a Chapter 7 Bankruptcy.
It is important to consult an experienced attorney to determine whether a Chapter 7 Bankruptcy or another bankruptcy option is the right for you. At Cockrell, Ford, Townsend & Ritchey, LLP, we have been assisting Debtors in bankruptcy for over 35 years. If you would like to discuss Chapter 7 Bankruptcies or other bankruptcy options, please contact us for a free initial consultation at 205-349-2009.