The Means Test

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In April of 2005, the president signed the Bankruptcy Abuse Prevention and Consumer Protection Act into law, after it was approved by the United States Congress. The consequent changes to the U.S. bankruptcy system took effect several months later, in October 2005. The Act was intended to restrict access to the U.S. Bankruptcy court for individuals, to discourage repeat bankruptcy filers, and to make it more difficult for those filing bankruptcy to do so under Chapter 7. Under the New Bankruptcy Law, as it is commonly known, those wishing to file bankruptcy are subject to a means test. This test helps determine whether a family or an individual is eligible for aid from the government. Furthermore, the Means Test is an investigative process.

The Means Test was used during the Great Depression, mainly as a way to screen applicants for different relief programs in the United States, such as the Home Relief program. Beginning in the 1960s it was used to screen applicants for the Food Stamp Program. In 1992 it was proposed that it should be used to screen applicants for future Social Security benefits, though it never came to fruition in this regard. In 2005 the Means Test was adapted for use in concurrence with the bankruptcy laws, in order to make certain that those who were filing for Chapter 7 were truly suffering under financial hardships, and to stop those debtors who were wealthy from filing Chapter 7 bankruptcy.

Eligibility for either Chapter 7 or Chapter 13 Bankruptcy is determined using the means test. Means testing involves two factors, the debtor's average state income level and the IRS's expense allowances. Those filing for bankruptcy with a gross income below their state's average will qualify for Chapter 7, and are not subjected to the Means Test. A person's gross income is determined by the six months prior to filing for bankruptcy.

Those with a gross income above the average state level will continue to the next step, which will determine whether or not the debtor has sufficient income, after subtracting living expenses, for debt repayment in accordance with Chapter 13 bankruptcy. However, in determining this, the debtor's actual living expenses are not used in the calculation; it is the IRS's expense allowances that are used. If it is determined by the Means Test calculations that the debtor cannot meet the necessary debt repayment requirements for Chapter 13 bankruptcy, he or she will be eligible for Chapter 7 bankruptcy.

The IRS allowances, known as Collection Financial Standards, are categorized as food and clothing, housing and utilities, and transportation. According to the IRS, food and clothing expenses are determined by household size and gross monthly income. Food and clothing allowance amounts are the same in every state, with the exception of Alaska and Hawaii. Housing and utility allowances depend on household size and location, while transportation allowances depend upon the region within the U.S. Housing allowances may be subject to variations if the debtor's house is located in certain metropolitan areas.

Bankruptcy Form 22A, used for Chapter 7 Bankruptcy, is a statement of monthly income and includes the Means Test calculations. It is the debtor's responsibility to ensure that the correct Means Test calculations are made and written on the form. Bankruptcy Form 22C, used for all Chapter 13 Bankruptcies, is a statement of current monthly income. This form also includes information pertaining to the debtor's disposable income and commitment period concerning debt repayment.


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