The following article was written by Theodore Sliwinski, Esq. and can be found on New-Jersey-Lawyers.com
The Bankruptcy Means Test
A. The Bankruptcy Means Test
Under the old bankruptcy law, almost any citizen of the United States could file for a chapter 7 or a 13. Before the law change, any debtors whose debts were primarily consumer related were only subject to scrutiny by the trustee or the bankruptcy court. Under the old law almost all debtors were entitled to file for a chapter 7 regardless of their income level.
The new bankruptcy law now “lowers the boom” on debtors. The new bankruptcy code now includes a formula test and it is called the bankruptcy means test. This test determines what debtors are eligible to file for chapter 7. The bankruptcy means test applies to debtors whose debts are primarily consumer debts. Consumer debts include credit cards, car debt, and mortgages. Many debtors are forced into bankruptcy because of a failed business or a large business related judgment. Any debtors who have primarily business debts are exempt from the means test and they may file a chapter 7 without completing the means test. The bankruptcy means test evaluates your income. Your income is then compared it to the official median income for households in the State of New Jersey as reported by the Bureau of Census in the most recent reporting year. The median income base increases with the size of your household.
Any debtors with an income equal to or below the New Jersey State median income for families of the debtor’s size are exempt from the bankruptcy means test. For those debtors with income above the New Jersey state median income, then there is a presumption of abuse on the part of the debtor. The debtor has the burden of disproving any presumption of abuse.
The bankruptcy means test evaluates whether your current monthly income is greater or less than the applicable median income. Your monthly income includes income from all sources. The term Current Monthly Income or (CMI) has a special meaning under the new bankruptcy law. CMI is defined as the average monthly gross income received during the six full months prior to your filing for bankruptcy. In applying the bankruptcy means test, the debtor’s average income over the past six months is used, regardless of present actual income. The CMI includes gross income from all sources including income of a non-filing spouse, regular gifts or assistance from family members, and gross income from a wholly-owned business. Any social security income is excluded from the definition of CMI.
If your CMI exceeds the State of New Jersey median income, then the bankruptcy means test applies a more complicated expense formula to determine your eligibility to file for chapter 7 case. The formula starts with your CMI and then it deducts several categories of allowed expenses to calculate your “net monthly income” which is presumed to be available to pay general unsecured creditors. The bankruptcy means test deducts certain expense categories from “current monthly income” to arrive at your “disposable income.”
B. Most debtors income levels are under the median income levels, and they are not affected by the means test.
The majority of debtors who consider filing for bankruptcy are under the median state income level. Therefore, most debtors pass the means test, and can file for a chapter 7. Any debtors who are over the State of New Jersey median income may have a more difficult time filing a chapter 7 case, and they may be forced to file for a chapter 13 case. The bankruptcy means test will not bar a debtor from filing a bankruptcy. Instead, the means test will only help determine what type of bankruptcy the debtor must file.
C. Bankruptcy Means Testing and Business Bankruptcy Cases
The bankruptcy means test does not apply in a business bankruptcy case. Business bankruptcy cases are the most significant exception to the new means testing requirements. Means testing only applies if the debts are “primarily consumer debts.” The “means test” does not apply to cases wherein a debtor incurs most of their debt in connection with the operation of a failed small business. Business bankruptcy cases are completely exempt from the means testing requirements. It is readily apparent that the new bankruptcy code favors business bankruptcy cases over consumer bankruptcy cases. Therefore, a bankruptcy court can’t dismiss a business bankruptcy case under the abuse standards that only apply to consumer cases.
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