|
In October of 2005, sweeping changes to the bankruptcy laws in this country were enacted. They were designed to make it more difficult to file bankruptcy and disqualify some from Chapter 7.
After practicing under the new laws and becoming familiar with their new-fangled provisions, I can assure you two things: One, the new laws force you jump through more hoops get under the protection of the system, however these hurdles are not insurmountable, and Two, once you make it inside the bankruptcy process, your relief in the vast majority of cases will be equivalent to, or greater than, what you could have received under the previous laws.
This is due in great part to the ineptness that Congress demonstrated in drafting the now famous “Means Test” as part of the anti-abuse provisions. They left many loop-holes in the actual application of the new rules. And we utilize those loop-holes on behalf of our clients in almost every case.
“Means Testing” is applicable in both Chapter 7 and Chapter 13 cases. The purpose of means testing is to disqualify from Chapter 7 certain debtors whom the means test determines can repay all or a portion of their bills in a Chapter 13 repayment plan. In a Chapter 13, the means test will determine the amount you must repay to your unsecured creditors, and whether you must file a three year or a five year repayment plan.
Means Testing in Ch 7 Cases – A “means test” will determine if you can file a Chapter 7 case. If you have more income than the test allows, or if the Court finds that you are abusing the system based on the totality of the circumstances, then your case will be DISMISSED, unless you agree to pay a portion of your debts under a Chapter 13 reorganization plan.
There are two objective tests applied to income and expenses to determine if your case will be dismissed or converted based on a presumption of abuse:
Median Income Test - The First test is to see if your Current Monthly Income (CMI) is MORE than the State Median Income. In reality CMI is not Current, not Monthly, and not Income - rather it is an amount based on your gross income during the six month before the month you file in, calculated using a complicated form, that has nothing to do with your actual income on the date of filing. “Median Income” means that there are an equal number of people in your state with incomes that are higher and an equal number that are lower than the median income amount. Basically this test looks to see if your family is better off than half of all the other families around you.
The median income for the State of Hawaii, subject to change from time to time is currently as follows:
1 person family: $45,306
2 person family: $53,284
3 person family: $67,551
4 person family: $79,240
*add $6300 for each individual in excess of 4.
If you fail the Median Income Test - the Second test checks to see if your Current Monthly Income (CMI) reduced by IRS and other allowed monthly expenses for a family of the same size, exceeds a certain amount. The Means Test is essentially an excess income test that determines what is left over out of your monthly income after deducting reasonable expenses.
If your Current Monthly Income is LESS than the State Median, there is NO presumption of abuse.
If your Current Monthly Income is MORE than the State Median, but your excess income is LESS than the amount allowed under the Means Test, there is NO presumption of abuse.
If your Current Monthly Income is MORE than the State Median Income, AND your excess income is MORE than the amount allowed under the Means Test, A PRESUMPTION OF ABUSE EXISTS.
If the presumption of abuse exists, and there are no special circumstances to rebut the presumption, you will have to repay a portion of your debts through a Chapter 13 plan, or have your case dismissed.
Disposable Income in Ch 13 Cases - The projected disposable income that you must pay to creditors under a Ch 13 reorganization plan is determined using almost the same complex formula that is used in a Chapter 7 case. In some cases the amount to be repaid on credit card and other unsecured debts will be close to zero. Some experts believe that if you have substantial income above the minimum payment amount determined by the disposable income test, you will be required to pay that extra income to your creditors. Other experts disagree and believe that you can keep any income over the required payment amount. Our office practices with great success this second approach.
If your income meets or exceeds the mean’s test, then the commitment period for a Chapter 13 Plan must be 5 years, instead of 3 years, unless the plan pays all claims in full over a shorter term.
As you can tell, the actual test is so complex, we strongly suggest that you make an appointment with our office to determine what kind of bankruptcy is available to you, or whether a debt settlement plan (a plan that avoids having to file bankruptcy at all is a viable alternative for you.)
| 
