Since 2005, when the Bankruptcy Abuse Prevention and Consumer Protection Act took effect, consumer bankruptcy filers have been required to complete the bankruptcy means test. In Chapter 7 bankruptcy, the means test determines whether a person is eligible for relief under Chapter 7. In Chapter 13 bankruptcy, however, the means test has no bearing on eligibility. Chapter 13 allows consumers to pay back some or all of their debts through a three- to five-year repayment plan. The Chapter 13 means test determines the length of the repayment plan and the dividend paid to unsecured creditors. Bankruptcy means testing can be very complicated, making it important to work with a qualified Kansas City bankruptcy attorney throughout the entire Chapter 13 process.
On the means test, your annual gross income is the average all income received during the six months before you filed bankruptcy. If your annual gross income is less than the median income for your family size, then your repayment plan can be as short as three years. If your annual gross income exceeds the applicable median income, however, then your repayment plan must be five years long, unless you can pay off all debts sooner.
Dividend to Unsecured Creditors
While most secured and priority debts, such as car loans and certain income taxes, must be paid in full through a Chapter 13 plan, unsecured debts do not necessarily have to be paid in full. Unsecured creditors receive anywhere from 0 percent to 100 percent of their claims, depending on the amount of non-exempt property you own, your current income and expenses, and the results of the Chapter 13 means test.
If your annual gross income is less than the median income for your family size, you need only complete the income portion of the means test, and the means test does not affect the dividend paid to unsecured creditors. If your annual gross income exceeds the applicable median income, however, then you must complete the expense portion of the means test to determine the monthly disposable income available for unsecured creditors. Not all expenses are allowable on the means test, and some expenses are limited to the IRS standard. As a result, the monthly disposable income on the means test may not be representative of one’s actual disposable income.
Despite this flaw, bankruptcy trustees use the means test to help determine how much your unsecured creditors must receive. For example, if the means test shows disposable income of $400 per month, then a 60-month plan should pay at least $24,000 to unsecured creditors. However, per a Supreme Court ruling in June 2010, the means test is a starting point only. This means trustees must consider circumstances that warrant an adjustment to the means test. Such circumstances might include loss of employment or other reductions in income, one-time payments received shortly before filing, and increases in allowed expenses.