Beginning in 2005 the Bankruptcy Reform Act instituted a requirement that any Orlando resident who wishes to file for Chapter 7 bankruptcy must submit to a bankruptcy “means test” to determine their eligibility. The means test is a formula designed to prevent people with higher incomes from filing for Chapter 7 bankruptcy. Prior to 2005 anyone who was a resident of the United States could file for bankruptcy under Chapter 7 regardless of their monthly income or ability to pay off debts.
The means test evaluates whether a debtor has the financial “means” to repay a substantial part of his or her debts through a repayment or reorganization plan in Chapter 13 bankruptcy. If so, the debtor will not be eligible for Chapter 7 but they can file under Chapter 13. Even if a person passes the means test, the option to file Chapter 7 bankruptcy could still be dismissed if the Bankruptcy Court finds that the debtor has the ability to repay a large portion of unsecured debts.
Could I be Exempt from the Means Test?
If your income falls under the median income for Orlando, Florida you may be exempt from the means test. Similarly, if your total debt is made up of more than 50 percent of “non-consumer” debts such as student loans, tax debts, mortgages on investment property, business debt, or business judgments, you may be exempt from the means test.
How is the Means Test Calculated?
The means test compares a debtor’s income to the Bureau of Census quarterly report of the median income for Florida households. Your current monthly income (CMI) will be calculated to determine whether it is greater or less than the applicable median income in your geographical area. The means test evaluates your CMI of the past six months prior to filing for bankruptcy. This includes income from all sources earned by everyone living with you (even a non-filing spouse or other family member), net rental income, gross income from a wholly-owned family business, and regular assistance from family members. Social Security income, however, is excluded from the CMI.
Your reported income on your federal tax return cannot be used in the means test calculation. There are many rules that apply but your bankruptcy attorney can assist you in these calculations. If your CMI is higher than Florida’s median income, the means test requires a more complicated formula to determine eligibility for Chapter 7 bankruptcy. Under this formula other expense categories may include standard living expenses, housing expenses, transportation costs, child care, income tax withholding, medical and dental care, tuition, alimony, child support, care for elderly parents, food costs, and clothing expenses. Such expenses can sometimes be deducted from your CMI to determine your net monthly income or disposable income.
Need Help with the Means Test?
An experienced Orlando bankruptcy attorney can educate you about everything you need to know for the means test. The attorneys at Tudhope Law are highly skilled in bankruptcy law and can counsel you in the complexities of the means test. Call us today to discuss your financial situation and to determine where you stand in terms of your income qualifications for bankruptcy filing.