Bankruptcy has become an everyday term, given the current economic situation in New York and the rest of the country. Despite the commonality of the word, most people don’t fully understand how bankruptcy works and what is needed to qualify. There are multiple types of bankruptcy filings, but two types of bankruptcy – Chapter 7 and Chapter 13, are the most common. Under Chapter 7, you may be able to have all of your qualifying debts erased. Under Chapter 13, you cannot have all of your debts erased, but you are able to set up a workable plan to repay your debts.
While it may seem ideal to have all of your debt erased in a Chapter 7 bankruptcy, there are some restrictions as to who can utilize this debt relief tool. To file for Chapter 7 bankruptcy, you must be financially qualified. If your six months of income is more than the median income as defined by New York law, then you must pass a secondary financial analysis, called the Means Test.
(Note that even under Chapter 7, all qualifying debts are eliminated – not simply all debts. Some debts, such as student loans, must be repaid even if you file for bankruptcy unless you can go above and beyond most requirements of bankruptcy and prove that paying back the loans would cause undue hardship.)
Bankruptcy Means Test: What Is It?
The means test is the first step in determining whether you may qualify to file for Chapter 7 debt relief. In order to qualify, you do not have to be completely destitute. However, you do have to fall under a certain state-determined income level. In making this determination, it is not only your income that is taken into account, but also your qualifying expenses and disposable income.
The goal of the means test is to predict whether you can afford to repay your debts and if so, how much you could afford to pay each month if you were to file for Chapter 13 bankruptcy relief.
If you do not qualify under the means test, there is what is known as “a presumption of abuse.” This presumption may be rebutted by a showing of “special circumstances.” [1] These special circumstances must be able to justify additional expenses or an adjustment to your income. In some cases, the special circumstances provision is the only way that an honest debtor may be able to avail themselves of Chapter 7 relief. We’ll talk more about this in a moment.
How Does the Test Work?
As already noted, the income used in the bankruptcy means test is created at the state level. Therefore, the amount of disposable income that qualifies a filer is determined by the state. In New York, a one-person family’s medium income is considered to be $49,632. The median income for a household of two is increased to $61,728.[2] As family size grows, so too does the median income. We’ll discuss in a moment the disadvantage that these numbers have on residents of Long Island, who face dissimilar economic circumstances than other New York Counties.
If your income falls below the median level, then you are automatically able to file under Chapter 7. If your income is in excess of the median level, then you must apply the means test. To do this, you must determine whether there is enough disposable income remaining after paying allowable monthly expenses, to pay off at least a part of your unsecured. The formula is complex, taking into account actual expenses, which must be compared with sometimes local and sometimes national standards. Once you’ve taken those expenses into account, you have your disposable income amount. In some cases, a disposable income as low as $117 can disqualify you from filing under Chapter 7.
Means testing is one area that provides some flexibility. If your income is more than the state median, which could disqualify you for Chapter 7 bankruptcy, there are several methods of overcoming and improving your chances of successfully passing the means test:

• Greater spending on necessities recognized by the means testing formula (insurance, charity, secured debt including car and mortgage payments).
• Required deductions based upon employment.
• Life insurance.
• Other necessary expenses.

This brings us to a critical question, which has been debated since the implementation of the means test over a decade ago…
Is the Bankruptcy Means Test Working?
The purpose of the test, which was created in 2005 as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), is to avoid bankruptcy abuse by preventing those who should be able to pay back some of their debts from being able to file for Chapter 7 relief. Those who do not qualify under Chapter 7 bankruptcy could, in theory, file for a Chapter 13 reorganization of their debts.
Under the current bankruptcy scheme, Chapter 13 can help someone seriously delinquent on a car or home payment to be able to help them keep these items by making payments they can afford through a court-defined payment plan. However, some feel that the Chapter 7 means test uses arbitrary income numbers, which ends up disqualifying people in true need of Chapter 7 bankruptcy relief.
Does the Bankruptcy Means Test Work?
It depends on whom you ask. Critics of the means test have pointed to a myriad of reasons why the means test is unfair and does not adequately assess whether an individual has the means to repay his or her debts. We touched on one of the issues above when we discussed the numbers used to define “median income.” Federal law requires that median income be defined by state, but as anyone who has driven through different neighborhoods in any state can tell you, economic realities can differ greatly between zip codes. Because the median income is the baseline factor to consider in whether someone can file for Chapter 7 relief, the playing field is not level for many New York counties, including Long Island and Suffolk counties.
The means test also fails to take into account changes in a individual’s financial circumstances, such as unemployment or other reduced income situations, which makes it look like the individual has more disposable income than he or she actually does. If that person cannot overcome the evidentiary hurdle of proving special circumstances, he or she may be unable to file for bankruptcy at all.
Because the means test requires a showing of the last six months of income, temporary changes in circumstances such as seasonal overtime may disqualify the person from a Chapter 7 filing. While some argue that the person could just wait a few months to file, that may be the difference between keeping a home or losing a home.
For some, attempting to prove special circumstances in order to file for Chapter 7 relief can be impossible due to the vague wording of the law. Bankruptcy courts across the nation have had differing opinions on what constitutes “special circumstances.” According to the bankruptcy court in In re Delbecq, 368 B.R. 754 (Bankr.S.D.Ind. 2007), based on BAPCPA’s legislative history, “the term ‘special circumstances’ requires a fact-specific, case-by-case inquiry into whether the debtor has a ‘meaningful ability’ to pay his or her debts in light of an additional expense or adjustment to income not otherwise reflected in the means test calculation.”
In short, it seems that the means test has done little but throw a series of overwhelming hurdles in front of honest debtors who are in need of financial relief.
The Takeaway
Determining whether you qualify for Chapter 7 bankruptcy relief is undoubtedly complex, but with the help of an experienced bankruptcy attorney, it is not impossible. Talking with a Long Island bankruptcy lawyer that understands the hurdles you face in achieving financial stability through bankruptcy can take away a lot of anxiety that you may be experiencing. Call us today at (631) 319-9136 for a free consultation and to find clear answers to your bankruptcy questions.

References:

[1] 11 U.S.C. 707(b)(2)(B)(i)
[2] Current figures as of May 2015.