“What happens if I flunk the bankruptcy means test? Does this mean that I have no bankruptcy options?”
Last month, I spoke with a Cartersville, Georgia couple who asked me this question. This Cartersville, Georgia couple read up on the internet about the means test and they knew they flunked it before they even came into my office. They were scared to death that they were going to lose everything they owned. Fortunately, we were able to come up with a plan that worked for this Cartersville couple.
The means test was designed by Congress to push higher income debtors out of Chapter 7 and into Chapter 13 bankruptcy. Many potential bankruptcy clients get extremely upset when the means test numbers work against them. Chapter 7 bankruptcy is not an option for bankruptcy debtors who substantially fail to pass the the means test. If you are one of these people, don’t yell at your bankruptcy attorney. Instead, you should yell at Congress.
Other than yelling at Congress, Chapter 13 bankruptcy may still be a good option for clients who totally flunk the means test. For example, in a 100 percent Chapter 13 plan, the means test does not matter. In other words, as long as you are paying back all of your unsecured creditors at 100 cents on the dollar, it does not matter that you flunk the means test.
Perhaps you are asking yourself this question, “Why would anyone want to file a Chapter 13 bankruptcy that pays all of their unsecured creditors at 100 cents on the dollar? What is the point?”
The answer to this question is that in Chapter 13, you don’t have to pay interest to your unsecured creditors. Unsecured creditors have no claim to any of your property. For example, credit card debt, medical debt and signature loans are examples of unsecured debt. In contrast, interest must paid to secured creditors like car creditors and furniture creditors.
Paying zero percent interest to unsecured creditors can result in a huge savings. For example, let’s say you have $50,000.00 in credit card debt that you can’t eliminate in a Chapter 7 because you flunk the means test. Most credit card debts I see carry an interest rate of at least 25 percent. If you have $50,000 of credit card debt at 25 percent interest, this means that you are paying $12,500 per year in interest alone. If we break it down monthly, that is $1,041 per month in interest payments. A person in this scenario could save $12,500.00 per year by filing a Chapter 13 case.
Not every story has a happy ending. There are some people who just can’t get relief from their creditors because the means test makes it impossible. To know for sure, you need to let a bankruptcy attorney examine the facts of your case.
Every case is different. Don’t ever read some article on the internet and think that you are banned from bankruptcy because you make too much money. Sit down with a bankruptcy attorney and let him give you a complete analysis of all your options. If you want to know how the law applies you, come to my office and sit down with me so that we can see how the means test applies to your specific situation.