Why Congress Added The Means Test To Bankruptcy

Since the US Bankruptcy Code changed back in 2005, filing bankruptcy has taken on a new complexity that many have trouble understanding. One of the main changes that is hard for many people to grasp is the means test. Congress added the means test to bankruptcy law when they changed the code. The reason behind it was to stop abusive bankruptcy filing. Who knows if it really worked. Prior to the law going into effect, there were record numbers of individuals trying to get their bankruptcy filing in under the deadline. In 2006 numbers dropped off substantially and it seemed to be working. Then, the overinflated real estate market melted down almost completely collapsing the economy. With this the perfect storm was created and unemployment skyrocketed over 10% nationwide. So much for keeping the numbers of those filing bankruptcy down, every year since the code changed it has consistently gone up all the way to one and a half million bankruptcy filings in 2010 alone.

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Getting back to the bankruptcy means test, the test can be very confusing to the untrained eye and has been criticized by judges and lawyers across the states and many bankruptcy cases. I guess it seemed like a great idea at its conception.

One must understand that the means test is just a financial formula that attempts to predict whether you can afford to pay off some or all of your debts. If you fall into that category of being able to pay your debts back you might be pushed into a Chapter 13 bankruptcy instead of the Chapter 7 bankruptcy you were trying to file. In a nutshell, Congress created the means test to decide what type of bankruptcy filing is appropriate for the debtor.

When Congress created the means test they were attempting to make a uniform method that would make debtors that had the resources, pay back part or all of their debts in a Chapter 13 bankruptcy payment plan. The nuts and bolts of the test are basically an income versus expenses test. What's funny is, someone filing for bankruptcy already had to fill out an income and expenses form that was added to bankruptcy law in 1986. Even though the Congress changed the code with the addition of the means test they still left the previous test intact. The actual income and expenses test considers your current income and household expenses and projects them into the future. This form will actually looks closer to a person's household budget.

The formula for the means test uses the last six months income along with a mixture of expenses that might be capped due to IRS allowances. With the addition of this and many other nuggets added to the bankruptcy code it's become inevitable that people should hire a bankruptcy attorney to help them navigate the complexity of the code. Where the debtor can help is to provide their bankruptcy attorney with all financial information including proof of past and present income and all their household expenses. The bankruptcy code was written by attorneys and it seems it needs to be understood by attorneys also.

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