A Summary of the Means Test under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005
By Eric C. Rajala, Attorney at Law

"The Law Office of Eric C. Rajala is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code."

The Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") generally became effective for bankruptcy cases filed on or after October 17, 2005. BAPCPA includes major changes in the determination of whether granting relief to an individual debtor under Chapter 7 would be abusive. Cases which are deemed abusive will be dismissed, or converted to Chapter 13.

Most individual debtors (including a husband and wife filing jointly) who seek relief under Chapter 7 of the Bankruptcy Code must pass a "means test" in order to be eligible for such relief. The means test applies to those debtors whose debts consist primarily of consumer debts (i.e., debts incurred for personal, family, or household purposes). The means test does not apply, and a Chapter 7 case may not be dismissed or converted to Chapter 13, if the debtor is a disabled veteran, and the debts occurred primarily when the debtor was either on active duty or performing homeland defense activity.

There are two major components to the means test:

1. First, if the debtor's Current Monthly Income is less than or equal to the median income for same-size households in the state where the debtor resides, then by definition, there is no presumption of abuse, and the debtor will generally be eligible for Chapter 7 relief.
   
   The term "Current Monthly Income" refers to the average amount of income received over the six month period before the filing of the case from wages and salaries, money earned from side jobs, investment income, interest income, and income for self-employed individuals, as well as gains on dealings with property, rents, royalties, dividends, alimony and maintenance, pensions, prizes and awards, gifts, inheritances, child support payments, unemployment compensation, and qualified foster care payments.
   
   The income of a non-filing spouse is only included to the extent of the non-filing spouse's contribution toward payment of household expenses. Current Monthly Income does not include Social Security benefits.
   
   
2. If the debtor's Current Monthly Income exceeds the median, then the debtor must calculate the amount of "Monthly Disposable Income" theoretically available to pay creditors under a Chapter 13 payment plan of 60 months duration. Monthly Disposable Income refers to the amount of income presumably available to fund a Chapter 13 plan, after deduction of certain business and living expenses pursuant to the means test formula.
   
   If this figure is less than $100, no abuse is presumed. If the figure is greater than $166.67, then abuse is presumed. If between $100 and $166.67, then the debtor's unsecured nonpriority claims are totaled and divided by four. If the monthly available income times 60 is less than ¼ of the unsecured claims, no abuse is presumed. If the monthly available income times 60 is greater than ¼ of the unsecured claims, abuse is presumed, and the Chapter 7 case may be dismissed, or converted to Chapter 13.

In practice, most people with average income - or even somewhat higher than average income - should be able to pass the means test, especially if they are carrying relatively high levels of secured debt (for example, mortgages, auto loans, etc.).