People's Law Guide
Jeffrey Solomon, Esq.
THE NEW BANKRUPTCY LAW AND THE MEANS TEST Submitted by Jeffrey Solomon, Esq: Despite the new act passed by Congress effective October 17, 2005, there is still a bankruptcy law and most people who need assistance still will be eligible to file a Chapter 7 bankruptcy to eliminate their debt. A Chapter 13 payment plan may be necessary and helpful in particular cases. Do not let anyone mislead you into believing there is no longer a bankruptcy remedy. The new law does create more work for clients and their attorneys. The new law has created many traps due to lack of knowledge about the new law. Congress has required that we use the term "debt relief agency", and attorneys must disclose that an individual is not required to have an attorney, but skilled legal advice is necessary now more than ever. Please do not wait to the last minute to seek bankruptcy assistance. A bankruptcy case cannot be filed without a certificate from an approved credit counseling agency. The new bankruptcy law creates a "means test". The theory of the means test is that there is a formula to compare your income to your expenses to determine if you can pay something back to your creditors. If you can make some payments to your creditors, then you cannot file a chapter 7 bankruptcy and you must file a chapter 13 payment plan bankruptcy. The vast majority of individuals will be eligible to file a chapter 7. The new means test does not prevent a Chapter 7 for most people, and the new law is not as bad as it sounds for most debtors. The initial analysis under the new law and its means test depends on whether or not the household income is under the median income for the state. The following table is effective October 1, 2006, and is subject to change annually. FLORIDA MEDIAN INCOME-2005 Household Size Household Income 1 person $ 36,796 2 persons 45,446 3 persons 51,001 4 persons 62,269 each additional person add $6300 The first step of the means test is to analyze your income. Congress has determined the method. We must look at your income for the 6 months prior to filing your case. The average of these 6 months times 12 is used to determine your annual income. This can create a number that is not realistic(depending on seasonal pay, bonuses, period of unemployment), but it is the number that we must use. If you are above the median income, there is a good chance you are still eligible for a chapter 7, but a chapter 13 payment plan might be necessary. If you are under the median income, you might have an absolute right to file a chapter 7. This issue should be discussed with your attorney. Social security is not included as income in the means test. The second step is to compare this artificial "current monthly income" to the median income of Florida based on the number in your household. If you are below the median income, then you "pass" the means test and can file Chapter 7. (There are unanswered questions still to be resolved. Can you define the number in your household? Sometimes it is easy, but with extended families or roommates living in the same residence, the answer is not clear as to how we will measure the size of your household. This will be a planning issue with your attorney.) Even if you are substantially above the median income, you may be eligible for a chapter 7. The means test allows certain reductions to your gross income. Payroll taxes, secured debt for your home and vehicle, allowed budget credits set by government guidelines such as for rent, food and clothing, and other reasonable and necessary expenses can be offset. If the means test shows you have excess income, even as little as $100.00 per month, then you would not be eligible for a chapter 7 unless there are what is called special circumstances. A chapter 13 payment plan bankruptcy can then be filed. You would make one payment per month to a bankruptcy trustee who would pay your creditors. You might only have to pay a very small percentage of your debt. There are other advantages to a chapter 13 which might make it preferable to a chapter 7. These should be discussed with your attorney. You will need to obtain records of your income for the last 6 months. All paystubs or other records from the employer will be necessary to verify income. All bank statements for the 6 months and other account statements such as from brokerage accounts will be needed. Greater detail will be needed if you are self-employed to determine the net income for the 6 months. There are many unanswered questions as to how the new law and the means test will apply to the particular circumstances of each person’s case. These matters should be reviewed with your attorney. The above information is for general information and cannot be relied upon as legal advice. Jeffrey Solomon is currently Section Chair of the Broward County Bar Association Bankruptcy Section. He is a member of the Bankruptcy Bar Association for the Southern District of Florida and the National Association of Consumer Bankruptcy Attorneys. He has lectured on the new bankruptcy law. He can be contacted at 954-967-9800, or at email@example.com. His website is at www.solomonlawoffice.com. As required by Congress to disclose, the Law Office of Jeffrey Solomon is a debt relief agency. We help people file for relief under the Bankruptcy Code. Jeffrey Solomon is the 2006 Chairman of the Broward County Bar Association Bankruptcy Section. He practices in Hollywood, FL.,and can be reached via the web at firstname.lastname@example.org