New Jersey residents who wish to file a Chapter 7 bankruptcy must first pass a means test. Lawmakers introduced the means test in 2005 when they passed the Bankruptcy Abuse Prevention and Consumer Protection Act. Individuals who cannot pass the means test can seek debt relief by filing Chapter 13 bankruptcies. Congress decided to include a means test in the bankruptcy reform bill to establish consistency and curtail abuse.
The first part of the means test
The bankruptcy means test is designed to find out if an individual has enough disposable income to repay at least some of their debt. The first part of the means test compares a bankruptcy filer’s income with the median income in their state for a family of the same size. If the bankruptcy filer’s income is lower than the median income, they pass the means test and their case moves forward. If their income is higher than the median income, their expenses are analyzed.
Only allowable expenses like food, rent and utilities are taken into account, and the amount is sometimes a figure set by the government based on national and local averages. The figures are processed using a similar formula to the one used by the Internal Revenue Service to determine how much delinquent taxpayers can afford to pay. Paycheck deductions, such as union dues, health and life insurance premiums and auto loan payments are also allowable expenses.
Preparing for the means test
Many individuals fail the bankruptcy means test because they fail to include all of their allowable expenses. Attorneys with debt relief experience could help individuals struggling to cope with difficult financial situations to prepare for the means test by making sure that all allowable expenses are listed and income figures are correct. Attorneys may also explain the differences between Chapter 7 and Chapter 13 bankruptcies and other options like debt consolidation and credit counseling.