Bankruptcy Means Test

NJ Bankruptcy Means Test

In October of 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted which included amongst other things, a new requirement for bankruptcy filers called the “Means Test”. The Act’s name is misleading in light of the fact that is was not passed by the Congress to prevent any abuse nor to protect any consumers.

In October of 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted which included amongst other things, a new requirement for bankruptcy filers called the “Means Test”. The Act’s name is misleading in light of the fact that is was not passed by the Congress to prevent any abuse nor to protect any consumers.

In October of 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) was enacted which included amongst other things, a new requirement for bankruptcy filers called the “Means Test”. The Act’s name is misleading in light of the fact that is was not passed by the Congress to prevent any abuse nor to protect any consumers. In fact the title itself is absurd. How in one piece of legislation are we to believe that abuse of the protection that bankruptcy gives consumers can at the same time be protecting those very same consumers? The answer is that it wasn’t.

 

It was passed after eight long years of lobbying by the banking industry which spent over $400 million to buy enough votes to get it passed. What the banks got in return was a more restrictive bankruptcy code which included the Means Test designed to discourage individuals from filing for bankruptcy. This is what the Means Test means for you.

 

Prior to the enactment of BAPCPA anyone who wanted to eliminate their unsecured debt could file a Chapter 7 bankruptcy petition and have all of those debts discharged without regard to their ability to pay them. Now under the Means Test, your income and expenses are taken into consideration to determine if you qualify for a complete discharge or whether you must repay some portion of those debts. This determination is made based on State specific data compiled from data supplied by the Census Bureau and the IRS and incorporated into the Means Test. It was last updated on November 1, 2014.

If you would like to file a Chapter 7 bankruptcy you must pass the Means Test. If your income is higher than the median for your area you will need to complete the Means Test calculation to determine if you can pay back a portion of your unsecured debts through a Chapter 13 bankruptcy.

Means Test Exemptions

If your debts are not primarily consumer debts, then you are exempt from the Means Test. This is important because even if your debts are primarily credit card debt, you can be exempt from the Means Test if you incurred those debts in support of a business. You are also exempt from the means test if you are a disabled veteran and incurred your debt primarily during active duty or performing a homeland defense activity.

Median Income

If your current monthly household income is less than the median income for a household of your size, there is a presumption that you pass the Means Test and are eligible to file aChapter 7 bankruptcy. Once you enter a qualifying income, you can skip the test as the “presumption of abuse does not arise”. This means that under the test, if you do not have a higher income, it is assumed that your debts are more than you can handle and that you are not “abusing” the system by filing for bankruptcy. On the other hand, if you make more than the permitted amount, it is assumed that you can repay some portion of those debt and you are therefore not permitted to file a Chapter 7 bankruptcy.

Your average household income is determined by averaging your monthly income over the last six calendar months. If you are over the median income limit and your income has declined over the last six months, then waiting one or more months might bring your income under the median level for New Jersey. Once you determine your average monthly income you multiply that by 12 to determine your annual income for the purpose of New Jersey median income test.

1 Member Household – $60,317.00

2 Member Household – $70,150.00

3 Member Household – $85,575.00

4 Member Household – $103,946.00

5 Member Household – $112,046.00

6 Member Household – $120,146.00

The Means Test

If your income is over the New Jersey median income for a household your size, then you must complete the Means Test by calculating your income and expense information. There are some actual expenses you are allowed to include such as obligations you are legally required to pay and expenses necessary for health and welfare.

After you have collected all the required information, you subtract all of your allowed expenses for New Jersey from your income to determine the amount of income under the bankruptcy law that you have available to pay your unsecured creditors in a Chapter 13 plan. Following this calculation, you then decide whether you still wish to proceed with your bankruptcy filing.