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WHAT IS THE "MEANS TEST"?

January 21, 2014

 The means test is a formula established by federal bankruptcy law meant to evaluate whether or not a debtor is able to pay his or her outstanding debts. The means test requires debtors who are contemplating filing for bankruptcy to calculate their average monthly income from all sources in the six months prior to the intended bankruptcy petition filing date. Gross wages, salary, bonuses, overtime and commission payments, tips, unemployment benefits as well as other forms of income are all included in the calculation of the debtor’s average monthly income.

 

If your average monthly income is below the state’s median income, you qualify for Chapter 7 automatically. In the event your income exceeds the state median, the test next evaluates whether or not you have sufficient income remaining to repay some of your debt following the deduction of certain permitted expenses. The federal Bankruptcy Code employs this test to identify those debtors who may be able to pay some money to their creditors — these debtors may be required to proceed under Chapter 13 instead of Chapter 7.

 

How is the median income determined?

 

Each state determines its own median income based on national statistics calculated by the IRS and the U.S. Census Bureau. At present, the estimated median income for a family of four in Washington State is approximately $73,000. The median income of a one-person household is approximately $43,000.

 

Why is the means test important?

 

Congress enacted the means test for the purpose of preventing fraud and abuse of the bankruptcy system.   If a person has the resources to pay back at least a portion of their debt, they are required to file for Chapter 13, which involved repaying creditors over the course of three to five years. Payments are overseen by a bankruptcy trustee.

It is crucial that you report your income and assets accurately, since an error could be costly as well as result in a fraud investigation.

 

The means test is a preliminary indication of the complexity of bankruptcy law. If you are contemplating filing for bankruptcy due to mounting debts, contact the attorneys at DC Law Group for your free initial consultation regarding the means test and the bankruptcy filing process.

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