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Up until 2005, consumers who fell on hard times were able to ride the coattails of lenient federal bankruptcy law to transform severe debt into a new financial skin of solvency. However, a growing number of business niches lobbied the United States Congress to change the relaxed and often contradictory bankruptcy statutes. Bankruptcy law made it fairly simple for debtors to qualify for bankruptcy relief. This placed creditors on the financial hook for billions of debt that bankruptcy courts dissolved.
When the Bankruptcy Protection Act of 2005 passed Congress, consumers washed in debt now had to pass a bankruptcy means test to become eligible for Chapter 7 bankruptcy.
The Bankruptcy Means Test
The primary goal of the Bankruptcy Protection Act of 2005 was to ensure bankruptcy represents the financial option of last resort to get out of debt. At the core of the landmark piece of federal legislation was the establishment of a bankruptcy means test. The bankruptcy means test provision of the Bankruptcy Protection Act of 2005 involves providing evidence of financial insolvency.
The primary hurdle for consumers to overcome is to prove the lack of income to take care of debt obligations. Debtor average monthly income for the six months preceding the filing for bankruptcy is compared with the state median family income. If a consumer earns less than the state median income, he or she qualifies to file for Chapter 7 bankruptcy. However, even if you pass the Chapter 7 bankruptcy means test, the trustee handling your bankruptcy case might decide that you have enough income after taking care of living expenses to pay back creditors in a Chapter 13 bankruptcy repayment plan.
Method of Income Calculation
The Bankruptcy Protection Act of 2005 makes it clear on how consumers must calculate income to determine qualifying for Chapter 7. In addition to wages earned from employment, consumers must also include income sources such as business revenue, securities dividends, investment interest, and real property income. Unemployment compensation and regularly scheduled child support payments also represent income for calculating the bankruptcy means test. Income not included for calculating the bankruptcy means test includes Supplemental Security income, Social Security retirement benefits, and federal and state tax refunds.
If you earn more than the median income level of your state, then you must under the Bankruptcy Protection Act of 2005 complete the second part of the means test to find out if you qualify for Chapter 13 bankruptcy. After you subtract the expenses permitted under the 2005 bankruptcy reform law, you might have enough money left over each month to create a creditor repayment plan. Considered the consumer version of business reorganization, Chapter 13 prioritizes the debts you have to pay, with secured debts the first types of debts that you have to erase from your personal financial ledger. The advantage of filing for Chapter 13 is you return to financial health much sooner than if you file for Chapter 7 bankruptcy.
Bankruptcy Means Test Exemptions
The Chapter 7 bankruptcy means test includes several exemptions. Disable military veterans who accumulated debt while serving on active duty do not have to submit financial data for the bankruptcy means test. More than half of a military veteran’s debt must have accumulated during active military service. If most of your debt derived from the operation of a business, the bankruptcy means test is irrelevant and you can file for Chapter 7 bankruptcy.
You might not meet the bankruptcy criteria of the means test, but you can still present your case for filing Chapter 7 bankruptcy documents. Life altering events that include unexpected unemployment and recent expenses to treat a serious medical condition can qualify you for “special circumstance” status under the Bankruptcy Protection Act of 2005. To earn “special circumstance” bankruptcy status, you need to hire a licensed bankruptcy law attorney to file a motion that includes all of the compulsory documentation.