Hurdles in Filing Chapter 7 Bankruptcy: Means Testing
If you are considering filing a Chapter 7 bankruptcy, you should be prepared for a bit of a fight. That’s because the federal laws associated with such action became significantly stricter in 2005, when Congress became suspicious about fraudulent claims. Because of those misgivings, filers face a presumption of abuse at the onset.
Understanding the Presumption of Abuse
The Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) aims to examine the income level of a debtor in order to determine whether or not they actually qualify for a Chapter 7 filing. That’s because Chapter 7 Bankruptcy discharges all debt, and Congress wanted to ensure only those who truly needed Chapter 7 would be eligible for it. A means test performs that analysis by making a comparison between a debtor’s income over the previous six months and comparing it to the median income across the state. If one’s income is below the median, they have met the standard for a Chapter 7 filing. For those whose incomes exceed the state median, a calculation of disposable income is made using IRS benchmarks and actual expenses, and a qualifying determination is made. Essentially, if disposable income over the previous five years exceeds $8,175, or $137 monthly, it is outside the framework for a Chapter 7 Bankruptcy filing. All sources of income except Social Security are tallied for this analysis, including unemployment, pensions, and wages. The idea is that if someone took on excessive debt because they were careless or mismanaged their money, they should be responsible for at least some of that debt. An option for those who do not meet the standards of the means test for Chapter 7 Bankruptcy might be a Chapter11 Bankruptcy, where only a portion of debt is discharged.
It is the duty of the applicant to prove that there is no attempt to perpetrate a fraud on the bankruptcy court by demonstrating that their earnings do not exceed means test limits. In some cases, special circumstances may have contributed to one’s excessive debt accumulation, explaining why such debt was incurred. Examples might include:
- Unexpected rent increases;
- Job loss, or cutback in hours;
- Medical expenses.
Exceptions to Means Testing
There are certain conditions under which means testing will not be applied:
- When more than 50 percent of the debt is business-related;
- When the applicant is a disabled veteran whose debt was incurred while on active duty;
- If the applicant is in the National Guard or Reserve Forces and was deployed for 1/6 of the previous 540 days.
Advocating for You
Filing for bankruptcy is a complex and highly regulated endeavor. At the Law Office of Julia Kefalinos, our experienced Miami bankruptcy attorneys know precisely how to navigate through such filings and will guide you through the process with confidence and proficiency. Contact our office today to schedule a confidential consultation.