Boca Raton Bankruptcy Lawyer

Filing Bankruptcy – The Means Test

So you’ve decided that bankruptcy is the best way for you to get out of the dire financial straits you are in. You have weighed all the pros and cons, considered alternative options, and come to a final decision. Now what? You understand the benefits and limitations of both Chapter 7 and Chapter 13 bankruptcy, but how do you know which one you are eligible for?

Under current bankruptcy law, a debtor must meet certain criteria to be eligible to file for Chapter 7 bankruptcy. This is where the “means test” comes in.

The means test is basically a set of calculations in order to determine if the debtor is abusing the bankruptcy protection system or not. It is designed to keep people from taking advantage of their creditors by filing for Chapter 7 bankruptcy protection when they are actually able to pay off significant portions of their debt. In other words, the means test compares the debtor’s ability to pay with the median income in their state of residence, the amount of unsecured debt they possess, and the possibility of a Chapter 13 repayment plan.

Step 1: Calculating CMI

The means test begins by calculating the Current Monthly Income (CMI) of the debtor. The CMI is basically a measure of the debtor’s average income over the last six months, including that of his spouse, plus any contributions toward household expense he receives from outside sources. This figure will be modified by removing any spousal contributions not made towards household expenses, yielding an “adjusted CMI.”

Step 2: Comparing Against Median Income

Next, both the debtor’s CMI and adjusted CMI are compared with the median income for households of the same size, in the same state, based on figures provided by the US Census. If the debtor’s CMI is lower than median income, the process is over, he is cleared of any allegations of abuse by creditors, and only the United States Trustee appointed by the court can file motions for dismissal based on abuse. If the debtor’s CMI is higher than median, but his adjusted CMI is lower, he moves on in proceedings but creditors are given the option to move for dismissal due to abuse. If the adjusted CMI is still higher than the state median, we move to the next step.

Step 3: Calculating NMI

At this point, another set of calculations is performed to determine the Net Monthly Income (NMI) of the debtor. NMI is determined by subtracting any exemptions the debtor qualifies for from his adjusted CMI figure.

Step 4: Applying NMI

Once NMI has been calculated, it is used to gauge whether a debtor has the ability to pay off a significant portion of his unsecured debt under a 60-month Chapter 13 repayment plan, in this case, 25%. The process is somewhat complicated, but can be simplified into something like this: if a debtor’s NMI is below $100, he is cleared of abuse. If it is above $167.67, there is a presumption of abuse. If his NMI falls somewhere between those figures, it is multiplied by the 60 months of the hypothetical repayment plan. If the resulting total is less than 25% of the debtor’s unsecured debts, he is cleared of abuse. If higher, once again, abuse is presumed and he is barred from filing for Chapter 7 protection.

The means test, though complex, is not the end of the bankruptcy procedure – it is only the beginning. Don’t try to figure out this complicated process on your own – call Boca Raton bankruptcy lawyer Eric N. Klein at 561-353-2800 to learn more.