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Can I qualify for a Washington State bankruptcy?
What is the "Means Test" and how does it work?
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WHAT IS THE “MEANS TEST”?
Purpose of the Means Test.
When Congress changed the bankruptcy laws back in 2005, one of the largest changes to the law was the introduction of a “Means Test”. The purpose of the Means Test is to look at the income people have made in the last six complete months before they file a bankruptcy, not including the month the case is filed, since it is not a complete month.
The Means Test uses IRS standards and tables to calculate what is allowable for food, clothing, gas, fuel and insurance, and many other expenses. This is supposed to make the calculation of what is left over (your “disposable income”) more fair. It also determines how long you must be in a chapter 13 plan, the “applicable commitment period”, if you are showing a certain amount of disposable (left over) income.
What is Used to Calculate Your Income.
Sources of income that we use to calculate your Means Test include wages, self-employment, family contributions, cash outs or early withdrawals from IRA’s and 401(k)’s, and other income.
If you are self-employed, we will need a Profit and Loss showing income and expenses, BY MONTH, FOR EACH OF THE LAST SIX MONTHS.
The Washington State bankruptcy attorneys in our office will ask you for income information to calculate whether or not you are above the state median income for a household of your size. The median income changes periodically, but right now it is a little bit above $50,000 a year for one person, and about $62,000 for two (gross wages - before taxes, insurance and other withdrawals are subtracted).
If You Are Below the Median Income.
If you are BELOW the median income, then your means test is simple, and most of the form is left blank. It means there is no presumption of abuse of a chapter 7 bankruptcy.
But the work doesn’t stop there. We still need to see if you have disposable income in the near future, taking actual income and subtracting actual expenses (NOT including your credit cards, medical bills, and other unsecured debts). An extreme example is where someone was unemployed for the last 6 months, but just landed a job making $200,000 a year – they might pass the Means Test, but they probably won’t be able to file a chapter 7 bankruptcy!
If You Are Above the Median Income.
If you are above the median income, then we will need to calculate a complete Means Test, which can get pretty complicated. Our goal is to see if it is possible to file a chapter 7 case, and if not, to see if we can keep you in a 3-year chapter 13 court-approved payment plan.
If you are above the median income, and still come out showing money left over after subtracting the IRS standards, and actual deductions-- for taxes, insurance, childcare, charitable contributions, unusually high ongoing medical and dental expenses, secured debt like cars and houses, and other expenses-- then you may need to pay that amount each month as part of a mandatory 5-year chapter 13 payment plan.
In a scenario such as this one, the primary goal of our WA State bankruptcy lawyers is to help you pay the least amount possible to your creditors and discharge as much as possible. Our clients still benefit greatly from a 5-year plan. They save their houses, reduce the amount they pay on their cars and trucks, pay their back taxes and child support, and discharge large amounts of credit cards and other unsecured bills.
Sometimes our Washington State bankruptcy lawyers encounter the opposite situation of what we gave as an example above – someone was making a lot of money over the past six months, but then was laid off or fired, or are chronically sick or injured and cannot work anymore. In that case, there may still be a presumption of abuse of a chapter 7 bankruptcy, but we can help you overcome that presumption of abuse by proving to the US Trustee or the Court that your circumstances have changed greatly. This can be complicated, and we work closely with you to get the best results.
We have an experienced staff and knowledgeable Washington State bankruptcy attorneys who understand the law and how to best help you get the results you want.
Call today to get your questions answered!
What exactly is the “means test”?
How does one pass it?
What specific factors are most often taken into account?