BANKRUPTCY

THE BANKRUPTCY MEANS TEST

The amendments in 2005 to the bankruptcy code have implemented a means test formula to all Chapter 7 cases.  It is used to determine whether or not the consumer should have enough money available to make some minimal payment to creditors in a Chapter 13 bankruptcy plan.

The Means Test Process

We compare your income to the median income in New Jersey for a family the same size as yours. If your income is lower than the median income, the process is over and you are eligible for Chapter 7 discharge.  If, however, it is above, it does not necessarily mean that you cannot file, rather, we must proceed to the second step in the test.

The second step contains two subparts:

1.         The IRS has established certain allowable expenses for the state of New Jersey that we will subtract from your income.  What remains after you allowable expenses are deducted from your monthly income is your "disposable income." If your projected disposable income over the next 60 months is less than $6,000, you will likely be able to file under Chapter 7. If your projected disposable income is greater than $10,000 over the next 60 months, a presumption arises that, absent special circumstances, you can pay something to your creditors and should convert to a Chapter 13.

2.         If your income is between $6,000 and $10,000, one final calculation must be done. If your disposable income over the next five years is greater than 25% of your unsecured, non-priority debts, the court will likely determine that you should file under a Chapter 13, so the creditors receive something. If, however, your disposable income over a 60 month period is less than 25 percent of your unsecured, non-priority debts, you will likely be able to file under Chapter 7.

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