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The bankruptcy means test: What it is and how it works

When you are struggling with more debt than you can handle, Chapter 7 bankruptcy can give you the fresh start you need. Unless they have significant assets that they stand to lose in this liquidation-type bankruptcy, most debtors prefer to file Chapter 7 because all unsecured and nonexempt debt is eliminated, there is no limit on how much debt may be discharged, there is no repayment plan, and the entire process is usually finished in as little as three months.

There’s a catch, though. To be eligible for this convenient and expedient resolution of your debt situation, you must pass the means test.

Are you eligible for Chapter 7?

Under the Bankruptcy Code, a Chapter 7 petition is considered “abusive” if your monthly disposable income is too high. The means test is a way of determining if you are in fact able to repay your creditors under a Chapter 13 arrangement instead. If calculations show that your average income for the past six months is less than the median income for New York households of equivalent size, then you will be allowed to file Chapter 7. If you appear to make too much money, then you may still qualify, but a closer look needs to be taken at your income first.

How to compare your income to the New York median income

Every year, the Census Bureau publishes family median income information for every state. Once you have the necessary data for New York State, multiply your monthly pay by 12 and compare the two results. As of April 1, 2017, the following limits apply.

  • Single-person household: $51,408
  • Two-person household: $66,056
  • Three-person household: $75,870
  • Four-person household: $91,998

If your wages put you above the median, then another calculation applies to determine if you have enough disposable income to make meaningful payments toward your debts. This is done by taking your income and deducting allowable expenses, such as:

  • Housing
  • Food
  • Medical care
  • Transportation
  • Certain debt payments like mortgages and car loans

If a deduction of necessary expenses does not leave you with much disposable income, then you will be allowed to file Chapter 7. Otherwise you will have to file Chapter 11 or Chapter 13, which are known as “reorganization” chapters because you get the opportunity to repay your creditors under a court-approved plan.

Means test exceptions

Not everyone who applies to file for Chapter 7 will be subjected to the means test.  The following circumstances enable an exemption.

  • Disabled veterans who became indebted while on active duty or participating in homeland defense.
  • Members of the Armed Forces Reserves and National Guard who were on active duty or participating in homeland defense for at least 90 of the 540 days prior to filing.
  • Those with a debt load that is mostly business-related (over 50%).

If you are struggling with debt and wondering if Chapter 7 will give you the relief you need, then contact a New York bankruptcy attorney who can review your debts and financial situation and recommend a fresh start that is fair to all involved. Jayson Lutzky is a personal bankruptcy lawyer with an office in the Bronx. He offers free in-person initial consultations can be reached at 718-329-9500. Visit www.MyNewYorkCityLawyer.com to learn more about Mr. Lutzky’s 33+ years of experience.

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