A reaffirmation is an official way to “reobligate” yourself on the loan. This involves the lender sending us a reaffirmation contract to be signed by you.
What Is the Means Test in The Bankruptcy Process?
Prior to 2005, there were qualifications in place to qualify for a chapter 7 bankruptcy. Prior to 2005, the qualifications for chapter 7 were based on your monthly budget. The trustee would look at your income and expenses, and conduct a money in / money out analysis. This does not count the payments on any of the debts that you were making, because those are going to be discharged and you are no longer going to be making payments on them. If after you pay your monthly expenses, you are going to have a significant amount of money left over at the end of the month, that disposable income could lead to an objection to you discharging the debt in a chapter 7 bankruptcy. If the objection was successful, you would be required to do a chapter 13 payment plan.
If you were required to file a chapter 13 payment plan, because it appeared that you had disposable income after you paid your monthly expenses, then the court would allow you to discharge the balance at the end of the chapter 13: after you had paid what you could afford over a three to five year period. So the monthly budget was the hurdle for qualifying for chapter 7. Unfortunately, a lot of credit card companies and banks were worried that people were fudging their budget figures to qualify for chapter 7. The credit card companies and the banks suspected that, in reality, there was more disposable income available and a lot of people could be moved into a chapter 13 – which would obviously mean more revenue coming into the credit card industry and the banks.
In 2005, the credit card lobbyists were able to draft an amendment to the Bankruptcy Code and get Congress to pass it, which was called the Bankruptcy Abuse Prevention and Consumer Protection Act. A big feature of this amendment was the means test, which is an additional qualification hurdle for a chapter 7 bankruptcy. The means test is a mechanical calculation of the past six months of gross income, which is a six-month snapshot of your household income, not just your personal income. For example, if you are a married person and you are filing for bankruptcy separately from your spouse, who does not wish to file, the court will look at the entire household income, and your spouse’s income as well. They’ll take that six-month snapshot and divide it by 6 then multiply it by 12 to project your annual gross income. Once they have that annual gross projection, they will then weigh it against the median income for a household of your size. Note that median income figures vary by state.
If your projected annual income is estimated to be less than the median income for a household of your size, then you pass the means test. If it is estimated to be higher, then you have to go through the second half of the means test. This second part involves netting out your expenses, just like you do with your budget, but the trick with the second half of the means test is that not all of those expenses are actual expenses. Some of them are, but some of them are actually standardized numbers based on IRS data of what a household of your size in your geographic region spends on things, such as food, clothing and utilities. So basically, what the means test requires is for you to standardize your expenses to a degree, at least, so you can’t claim that you have high expenses (without sufficient proof) in order to qualify for chapter 7.
If you can get through the second half of the means test and it nets out enough expenses to show that you don’t have the “means” to do a chapter 13, then you would pass the second half of the means test. If not, you’ll actually go to the third part of the means test where if you don’t have the means to pay a certain percentage of your debt or to estimate that the number’s low enough where you’d only be paying a very small amount into a chapter 13 plan, the court will actually let you go into a chapter 7 as well. A good rule of thumb is if you’re more than $10,000 over the median income, you probably can’t get past the second half of the means test. It doesn’t mean it’s impossible, but it’s a lot more difficult. Some things that can help you on the second half of the means test are secured debts, like mortgage payments, auto loan payments and, if you’ve got kids, daycare expenses. Those kinds of things you’re allowed to take actual expenses on in the second half of the means test.
Obviously, those are pretty big expenses that can affect an individual’s pocketbook quite a bit and can make it more likely to pass the second part of the means test. The means test is really putting into place this mechanical calculation to qualify for a chapter 7, and that’s why we need six months of paystubs from our clients when we move forward with bankruptcy. With the means test, the banking industry thought a lot more people would be put into chapter 13 as opposed to chapter 7. However, the suspicion of the banking industry was completely unfounded: people were not fudging the numbers and making up expenses as a rule, and there certainly didn’t need to be this mechanical qualification test grafted onto the Bankruptcy Code.
Unfortunately, what it did do, was make a lot more work for the attorneys. If you filed bankruptcy before 2005 and are looking at filing for bankruptcy now, you’re going to notice a big difference in the legal fees because it’s a lot more time and effort on your attorney’s part, at least, to get you past the means test. But it doesn’t mean it’s prohibitively expensive, but you will find that it’s not as cheap as it used to be. In chapter 13, you still do the means test, which plays two roles. First, if you are calculated to be over the median income for a household of your size, you have to do a five-year plan. If you’re under the median income in a chapter 13, you have the option of doing a three- or five-year plan if you want.
Sometimes it doesn’t make sense to do less than a five-year plan, and this varies case-by-case; but if you are under the median, you, at least, have the option of doing as little as a three-year plan. When the means test was originally put into the Bankruptcy Code, it was conceived that it would spit out a number in chapter 13s which would dictate what the monthly payment was. Unfortunately, that caused a lot of problems because, obviously, those standardized expenses aren’t true in every single household, so a lot of people were spending more on utilities and necessary living expenses than what the standardized number was.
In 2010, the United States Supreme Court in Hamilton v. Lanning held that in a chapter 13, the payment should be based on projected monthly expenses, not necessarily on the expenses that are listed in the chapter 13 means test.
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Chapter 13 is essentially a payment plan that you organize through the court system. Think of it as a consolidation loan with teeth.
There are 2 things you must do after your case is filed: (1) attend the meeting of creditors (aka the 341 hearing); and (2) complete a debtor’s education course via phone within 75 days from the date your case was filed. The 341 hearing is sometimes referred to as the meeting of creditors because your creditors can attend the meeting and ask you questions about the information contained in your petition.