Exemptions from the Bankruptcy Means Test
Under the substantial revisions to the federal bankruptcy laws in 2005, Congress changed consumer eligibility for discharge of debt under Chapter 7, requiring that applicants qualify by passing a “means test.” The means test looks at income and debt, and disregards your claimed actual current income and expenses in determining whether the you have the “means” to pay creditors. Instead the “Means Test” applies a formula based on what the IRS uses in calculating what payments it will accept for repayment of unpaid taxes. If the formula shows a calculated ability to pay creditors in excess of a certain monthly amount, you are then ineligible for Chapter 7 and instead must repay creditors over a three-to-five-year period, with the minimum repayment being calculated under a variation of the Chapter 7 Means Test formula.
This can be a real problem where your actual expenses do not leave you with enough left over income to pay the calculated minimum payment.
There are some instances where the means test will not apply. For example, if the majority of your obligations (including taxes and mortgage debt) are “non-consumer” debts arising from or incurred in a business or investment, you don’t have to submit to the means test. In addition, you may be able to sidestep the means test if:
- You are a disabled veteran whose obligations arose mostly when you were on active duty or were engaged in any activity related to or promoting homeland security or defense. The bankruptcy rules require that your disability be rated at 30% or higher, and that you have been discharged because of your disability. In addition, your disability must have been sustained in the line of duty.
- You are in the military reserve or a member of the National Guard, and you were called to active duty after September 11, 2001. You must have been on active duty or involved in a homeland defense activity for 90 days or more. If you qualify, you will be exempt from a means test while on active duty and for 540 days after discharge.
The Means Test is a complication that is not always easy to apply. Yet careful planning—and in some cases, proper timing—can make a huge difference. This is an area where early planning and advice from a qualified and experienced bankruptcy lawyer are critical.
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