In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), introducing several new bankruptcy laws. One of the changes BAPCPA brought about was means testing. Now, when consumers want to file Chapter 7 bankruptcy, they must complete a means test to determine their eligibility for a Chapter 7 discharge. Chapter 13 debtors also have to complete a means test, though it does not determine their eligibility for filing Chapter 13 bankruptcy. Bankruptcy means testing is a complicated process best handled by an experienced Morris County bankruptcy attorney.
One function of the Chapter 13 means test is to determine the length of a debtor’s Chapter 13 repayment plan. The means test compares a debtor’s household gross income during the six months preceding filing with the median income for the debtor’s household size. If a debtor’s household gross income is less than the applicable median income, he or she can propose a repayment plan as short as three years. However, if a debtor’s household gross income is more than the applicable median income, then the debtor must propose a five-year repayment plan, unless all debts — including 100 percent of unsecured debts — can be paid off sooner.
Dividend Paid to Unsecured Creditors
Another function of the Chapter 13 means test is to help the bankruptcy court determine what percentage the debtor must pay back to unsecured creditors through his or her Chapter 13 repayment plan. If a debtor’s household gross income is less than the applicable median income, then the debtor does not have to complete the expenses section of the means test and can pay back as little as 1 percent to unsecured creditors, depending on certain other factors. If the debtor’s household gross income is more than the applicable median income, however, the means test becomes a bit more complicated.
Debtors whose household gross income exceeds the applicable median income must complete the entire means test, including the expenses section. A Chapter 13 debtor is allowed to deduct certain actual expenses, such as payroll taxes, mandatory retirement and voluntary 401(k) contributions, ongoing charitable donations, and mortgage payments. A debtor can also deduct the IRS standard amount for certain other expenses, such as transportation costs, non-mortgage housing expenses, and healthcare expenditures, although the debtor may be able to deduct more than the IRS standard if there is documentation available to support the higher amount. After all allowed expenses are deducted from a debtor’s household gross income, the resulting amount is considered the debtor’s monthly disposable income. This amount, multiplied by 60, is what the debtor will be expected to pay back to unsecured creditors, unless he or she can demonstrate extenuating circumstances like a recent or anticipated decrease in income.
Determining which income sources have to be included and what deductions will be allowed can be tricky, especially for people unfamiliar with bankruptcy laws. Further complicating matters, means testing continues to be affected by bankruptcy court decisions around the country. To ensure you do not make costly mistakes when completing the Chapter 13 bankruptcy means test, contact an experienced Morris County bankruptcy lawyer today.