Posted by on Mar 17, 2021 in Finance, Financial Planning | Comments Off on Understanding the Means Test for Bankruptcy Filing

Understanding the Means Test for Bankruptcy Filing

With the passage of the BAPCPA in 2005, bankruptcy has become more complicated. The means test is one of the components of a bankruptcy filing. Prior to 2005, Congress claimed that so many Americans were exploiting the bankruptcy system and wanted to make filing for bankruptcy more difficult. To do this, they invented the means test. The means test can be perplexing to someone who is unfamiliar with the modern bankruptcy filing process. The majority of people do it in the same way they would traditional accounting. In reality, an accountant is the person who is most perplexed by the new procedure. It’s difficult for them to get past the peculiar manner in which income is calculated. about it

To comprehend the bankruptcy filing means exams, one must first realise that they are nothing more than a financial formula. Trying to solve the problem with accounting and arithmetic won’t succeed. You’ll need to learn how to use the bankruptcy means test formula to plug in the numbers. The aim of the means test is to enable the court to determine if a person is capable of repaying any or all of their debts. If the bankruptcy court decides that a person should pay off any of their debts based on the means test, they will be required to file a Chapter 13 bankruptcy rather than a Chapter 7 bankruptcy. In a Chapter 13 bankruptcy, the formula is also used to decide how much a person will pay under the Chapter 13 plan. In a nutshell, Congress developed the means test to assist the court in determining whether an individual has to file Chapter 7 or Chapter 13 bankruptcy. The aim of Congress was to provide uniformity to all bankruptcy filing chapters.

What’s more surprising is that Congress has kept the 1986 revenue and expenditures test unchanged in the new bankruptcy code. When the means test is taken into account, there are now two revenue and expenditure checks. The debtor is just halfway to filing Chapter 7 bankruptcy after passing the means test. In order to apply for Chapter 7, the bankruptcy court looks at the individual’s income and expenditures.

The means test calculates an individual’s annual median income using a formula based on a look-back timeline. The person filing for bankruptcy begins with their income for the month prior to filing bankruptcy and adds up all of their previous income for a period of six months. The annual median income is then calculated by dividing it by six and multiplying it by twelve. Finally, compare that figure to the median income chart for the state where the individual lives. The debtor has passed the means test whether it is equal to or less than. But hang on a second, the debtor is just halfway there. The debtor must pass the income and expenditures test in order to file Chapter 7 bankruptcy. The debtor must complete the schedule, which includes a list of all of their household expenses as well as a comparison of their current income. It tends to be a standard household budget. The court needs to see that the debtor has no or very little money left over after paying their existing salary to cover their living expenses. If the debtor has any disposable income at the end of the month, the bankruptcy court will compel the debtor to file for Chapter 13. With all of the extra hoops to go through, it’s easy to see how filing for bankruptcy has become incredibly difficult. It’s a smart idea to delegate the job to the professionals and have a bankruptcy attorney handle it.