Congress created the means test in 2005 in order to help courts answer the age old question "How rich do you have to be in order to pay unsecured creditors in a bankruptcy?"

In bankruptcy, you will have to pay non-dischargeable debts, such as taxes and student loans. You will also pay on secured property you wish to keep. Usually, our clients will not have to pay anything on credit cards, medical bills, and other dischargeable debt. However, if clients do make enough money, they will need to pay at least something towards this dischargeable debt.

Most everyone agrees that if you are a regular Joe or Jane, drive an eight year old pickup, have a couple kids, and work down at the local factory or distribution center, you will not need to pay any money to credit cards - you need all your money to run your household. Most people would also agree that if you are a stockbroker, live in a $550,000 home on the golf course, drive an Escalade, and pull down $300,000 yearly, then obviously you have the ability to pay at least some of your consumer debt back, and you should as it is only fair.

The problem lies in the middle of the scale, where most people are. Before reform, there were great differences in how bankruptcy courts around the country decided who was rich and who was not. Judges out in California and Florida had very different ideas about personal wealth than judges here in the Midwest. Congress wanted to make the decision-making more consistent, so it created a mechanical test to give the courts guidance.

It is a two part test. The first task is to determine your average gross income, for the last six months, from all sources. You compare this average monthly income number to the median income for your household and state. You can find this chart here.

If you make below median income for your household size, the court presumes you can file a Chapter 7 and cancel the credit card debt. Alternatively, you can file a Chapter 13 and not pay any additional money in to the general unsecured creditors (the debts that are discharged at the end of the Plan). If you make above median income, the court presumes you do not qualify for a Chapter 7, and you need to look at filing a Chapter 13.

At this point you proceed to the second part of the test, which is a form that lists the expenses allowed for your household. Some expenses are taken from tables published by the Internal Revenue Service. For instance, as of February 2010, if you are a family of three making $69,000 yearly, you are allowed $985 for general household expenses - food, clothing, and upkeep. Other expenses, such as your medical insurance costs, are taken straight from your budget.

The test deducts all allowable expenses from your average income. The result is your disposable income - how much money that ought to be in your pocket at the end of the month. You pay this amount, into the plan, as additional money. The Chapter 13 Trustee will pay this money out to credit cards and other general unsecured debt. Many times, after deducting expenses, your disposable income is less than $0. If so, you usually still file a Chapter 13, but you do not pay in any additional money.

The means test is a way to make bankruptcy more consistent and fair. Most of our clients make less than the median income number, or make more, but have reasonable and necessary expenses that take up all their paycheck. The judge will never make you pay more than you can afford to get through the bankruptcy. We can analyze your budget when you come in, and give you a good idea of what you will be looking at when you file.