Means Test in Bankruptcy Filing Colorado
The “means test” is used to determine whether a person is eligible for a Chapter 7 bankruptcy filing or, instead, must file a Chapter 13 bankruptcy.
Although the forms for the means test are somewhat lengthy, the principle is simple to understand.
A Chapter 7 Bankruptcy is basically a liquidation, which is usually completed in 4 to 6 months—the debtor is entitled to keep certain property that is exempt under the applicable law; anything else of value would be sold by the trustee to pay unsecured creditors.
A Chapter 13 Bankruptcy requires the debtor to make payments to unsecured creditors over a 3 or 5 year period. The means test simply calculates whether the debtor, if his income is greater than the state median, will have enough income after paying necessary living expenses and required debt payments, to pay at least 25% of unsecured, non-priority debt, or $10,950 (this is the current figure, which increases periodically), whichever is less.
If the debtor fails the means test, then a Chapter 7 filing would not be presumed abusive. However, the judge can, if the facts of a particular case warrant, rule that allowing the debtor to file Chapter 7 would be abusive, and could, therefore, force him to convert his case to Chapter 13 anyway.
According to a recent report (see below), 94% of the people filing for bankruptcy had incomes below their state’s median income, so most debtors do not have to worry about the means test.
The form for the means test consists of 4 major sections to determine:
- average monthly income for the 6 months prior to filing;
- living expenses as determined by the Internal Revenue Service for a particular locality, and other necessary expenses;
- the total monthly payments needed for secured and priority debts;
- and whether there is enough income left over, if greater than $6,575, to pay at least 25% of the debtor’s unsecured, non-priority debt, or $10,950, whichever is lower.
- There are 2 columns for a joint filing by a married couple, if applicable.
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