The “bankruptcy means test”, less commonly referred to as the “BAPCPA means test”, is one of the conditions that an individual filing for bankruptcy must fulfill before they can file a petition for Chapter 7 bankruptcy.
The bankruptcy means test stems from a federal bankruptcy regulation that was enacted by Congress back in 2005 that is known as the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Hence, why the bankruptcy means test is also sometimes called the BAPCPA means test. The test consists of two separate parts, which will be discussed in further detail below.
In addition, the bankruptcy means test happens to be one of the strictest requirements of the BAPCPA. Since the passing of the act and this test, it has become much more difficult and costlier for debtors to file for Chapter 7 bankruptcy in the United States. Debtors who fail both levels of the bankruptcy means test will be forced to file for Chapter 13 bankruptcy instead.
To learn more about the bankruptcy means test as well as which chapter of bankruptcy would be best suited to your personal financial situation, you should speak to a local bankruptcy attorney immediately for legal advice that is tailored to fit your specific needs.
How Does the Bankruptcy Means Test Work?
As discussed above, the passing of the BAPCPA made it much harder to file for Chapter 7 bankruptcy. A debtor who intends to file for Chapter 7 bankruptcy must pass the bankruptcy means test first before they may petition a federal bankruptcy court. The bankruptcy means test helps the court to determine whether a debtor is eligible to file for Chapter 7, or if the debtor will need to convert their bankruptcy documents to a Chapter 13 filing.
Basically, how the bankruptcy means test works is that the debtor must demonstrate that their income is either equal to or falls below the median income level in their home state. If it is discovered that a debtor’s income is higher than the median income level in their home state, however, then the debtor will be required to pass a second type of test.
The second part of the bankruptcy means test is performed by measuring the monthly income of a debtor against their monthly essential costs, such as groceries, medications, and other necessities. If a debtor fails to pass the second part of the bankruptcy means test as well, then they must convert their Chapter 7 bankruptcy case to a Chapter 13 bankruptcy case.
The process to convert a Chapter 7 bankruptcy filing to a case for Chapter 13 bankruptcy can be very costly since it will require filing additional documents and because cases for Chapter 13 bankruptcy tend to be more expensive than Chapter 7 bankruptcy cases on the whole.
In addition, a debtor may also face legal consequences if it can be proven that they intentionally failed the bankruptcy means test to file for a more convenient and less expensive chapter of bankruptcy (i.e., Chapter 7).
If I Pass the Bankruptcy Means Test, Do I Automatically Get Chapter 7 Bankruptcy?
In general, Chapter 7 bankruptcy petitions are reserved for debtors with high amounts of debt, low incomes, and who are in need of a quick way to obtain financial relief. As previously mentioned, the bankruptcy means test helps federal bankruptcy courts to separate which debtors need relief under Chapter 7 bankruptcy from those who are better equipped to handle the conditions of relief provided by Chapter 13 bankruptcy declarations.
This is also part of the reason why the bankruptcy means test is divided into two different sections. Thus, if a debtor is able to demonstrate that their income is equal to or falls below the median income level in their home state during the first portion of the bankruptcy means test, then it means that the debtor will most likely be eligible to file for Chapter 7 bankruptcy.
On the other hand, if a debtor fails the first portion of the bankruptcy means test because their income is higher than the median income level in their home state, then they must be prepared to balance their monthly essential expenses against the amount of income that they take in each month.
The federal bankruptcy court will then assess these calculations and issue a decision on whether the debtor is qualified to apply for Chapter 7 bankruptcy, or if they must apply for Chapter 13 instead.
If the court determines that a debtor is still eligible to file for Chapter 7 bankruptcy, then the debtor may proceed with their case. If not, then the debtor will need to convert their Chapter 7 filing into a case for Chapter 13 bankruptcy.
Therefore, unless a debtor can prove that their income is less than or equal to the median income level in their home state immediately during the first portion of the test, they typically cannot automatically file for Chapter 7 bankruptcy by simply passing the means test.
Do I Have To Take the Bankruptcy Means Test if I am Converting into Chapter 7 from Another Type of Bankruptcy?
Courts are split over whether a debtor needs to pass the bankruptcy means test if they are converting from another type of bankruptcy to a Chapter 7 bankruptcy. Regardless of which position a federal bankruptcy court takes, a debtor will still be required to submit evidence that shows why they should be granted relief from debt under Chapter 7 bankruptcy.
In most instances that involve converting into Chapter 7 bankruptcy from another chapter of bankruptcy, a debtor will either need to prove that they are experiencing extreme financial hardship due to some unforeseen circumstance or must demonstrate that they failed to meet their debt repayment deadlines as required by their bankruptcy reorganization or repayment plan.
The court will consider the debtor’s evidence and their current financial standing by reviewing various documents, such as bank statements and tax returns. Thus, some courts may not require a debtor to pass the bankruptcy means test to convert their case to a Chapter 7 bankruptcy if there is enough evidence to prove they automatically qualify.
However, even if a court does require a debtor to pass the bankruptcy means test before converting to Chapter 7 bankruptcy, a debtor who is experiencing extreme financial hardship is more likely to pass given their new financial situation.
Do I Need a Lawyer?
The process for filing a petition for bankruptcy is not only procedurally complex, but can also have a long-lasting impact on your financial and personal circumstances that could potentially affect the rest of your life. This is especially true in cases where a petitioner’s bankruptcy paperwork contains an error or some other issue is discovered in connection with a petitioner’s bankruptcy documents.
To make matters even more complicated, the federal U.S. Bankruptcy Code is consistently amended on at least a yearly basis. Thus, if you plan on filing a petition for bankruptcy, you should strongly consider hiring a local bankruptcy lawyer for further legal guidance.
An experienced bankruptcy lawyer can assist you in determining whether you have passed the bankruptcy means test and can advise you on which chapter of bankruptcy best suits your needs. Your lawyer can also help you to prepare and file the necessary legal documents required when filing for bankruptcy as well as can provide legal representation in federal bankruptcy court and at your 341 meeting of the creditors.
In addition, your lawyer can keep you abreast of any changes made to U.S. bankruptcy laws and can explain how such changes may potentially affect the outcome and/or any other stages of your bankruptcy case.