If people struggle to pay their debts, they have the option of filing for bankruptcy. Many individuals choose Chapter 7 because it discharges debts faster than Chapter 13. However, a person in Fort Lauderdale, Florida, must pass a means test to be able to file for Chapter 7.
The Bankruptcy Abuse and Consumer Protection Act (BACPA)
In 2005, Congress enacted the BACPA to prevent misuse of the system. Before the provision passed, high earners could file Chapter 7 and get their debts dismissed even if they had the income to pay for them. Chapter 7 is a liquidation of nonexempt assets with proceeds from the sales going to creditors to pay unsecured debts. One purpose of the means test was to encourage more filings of Chapter 13, which includes a repayment plan over several years.
An explanation of the means test
This two-step test compares an individual’s income with the average income of a similar household to the state median. If a person’s income is lower than this amount, he or she passes the first portion of the test with no further testing required.
The second part of the test involves calculating an individual’s income from the previous six months while deducting expenses. These expenses are usually necessary, such as mortgages, household utilities, medical, food and clothing as outlined by the IRS. Expenses for public transportation and owning a vehicle could be deducted if a person’s family depends on it.
Sometimes, even high earners can still qualify for Chapter 7 if they have enough deductions to meet the threshold. Another loophole for filers with higher incomes is to file their personal debt along with their business debt, which is exempt from the means test.
People who aren’t allowed to file for Chapter 7 could try again if they expect income changes. However, since bankruptcy filings impact people’s credit for several years, they should carefully study their options before filing.
