What is a Means Test?

For million's of Californians facing financial hardship, seeking a Sacramento bankruptcy Attorney for the purpose of filing for bankruptcy protection used to be a no brainier. Got too much debt? flush it away with a simple legal stroke of the pen with a Chapter 7 Bankruptcy. This is otherwise known as declaring bankruptcy or personal bankruptcy. However, since lending institutions like can not use collection methods like Don Corleone in The Godfather, they used the next best thing... getting congress to put the proverbial squeezes on everyone's ability to declare bankruptcy with new legislation called a means test.

Simply put, in regards to the ability to file bankruptcy the "means test" is a mathematical equation that determines whether or not you are financially able to pay your debt. A Chapter 7 bankruptcy is a way of wiping out your portions of you debt completely because your income is too low. Failing the means test assumes your income is high enough to afford a debt repayment plan. This is the foundation for filing a Chapter 13 bankruptcy.

The big pitch that sold the means test.

The reasoning behind a means test was that people with higher incomes were filing for chapter 7 bankruptcy even though they had the means to repay their debt obligations. Lenders convinced Congress that they needed a formula to help push those individuals into Chapter 13 bankruptcy. Financial institution lobbying groups cited industry studies that affirmed their position and how this was a sever problem needing a solution. However, independent studies demonstrated the creditors' studies were incorrect. There simply were not the numbers of individuals scapegoating their debts by filing Chapter 7 to avoid a debt repayment option offered by filing for Chapter 13 bankruptcy. The facts of the opposing studies didn't matter to Congress. Their votes to pass a means test was bought for pennies on the dollar. The means test was born on October 2005.

The means test formula

The formula is about finding and measuring your disposable income or your debt to income ratio and measuring that against the median income of individuals and household in California. To do this deduct your monthly expenses from your average gross monthly income. This will identify your disposable income. Keep in mind, to pass a means test, your average monthly income is your gross earnings during the last six months prior to filing bankruptcy protection. The amount of your disposable income will play a crucial factor in your attempt to pass the means test.

Here's the catch.

The means test only applies to consumer debt, not business debt. Since there were greater numbers of middle class folks in Sacramento and the US for that matter needing Chapter 7 protection, by making this stipulation, it did not apply to the wealthy or businesses that invest their money for capitol gains. Thereby allowing them to continue in the very same behavior that would put a middle class debtor in financial trouble. It's good to have a lobbying group on your side.

And Here's The Kicker

Keep in mind that even if you have a lower household income with hire debt than the median family in Sacramento or California thereby passing the means test, it does not guarantee you the ability to file Chapter 7 Bankruptcy. Filing for bankruptcy in the state of California is a mine field of obstacles. Like any legal solutions, it's best to be informed of your rights and obligations.

Attorney Michael Noble is a Sacramento Bankruptcy Attorney and has navigated the local legal courts for over 20 years. If you want to find out if you could qualify for filing chapter 7 bankruptcy, Attorney Michael Noble offers a 2 hour free consultation for this purpose.