Bankruptcy Means Test in Texas: Do You Qualify for Chapter 7 Bankruptcy?
The means test is a big factor in determining if you qualify for Chapter 7 bankruptcy or if you have to file Chapter 13. In Texas, there are specific guidelines that consider both state and federal factors. Knowing how the means test works and how to navigate it is key if you’re considering bankruptcy as a way to get back on your feet.
This article will break down the means test in Texas, what it’s for, and the steps and options for Texans who are struggling to make ends meet.
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What is the Means Test?
The means test is a tool to determine if an individual or household’s income is low enough to qualify for Chapter 7 bankruptcy which discharges most unsecured debts. If your income is above the allowed threshold, you may only have Chapter 13 as an option, which requires a repayment plan over several years.
The means test was introduced as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Its purpose was to prevent people who could pay their debts from filing Chapter 7 bankruptcy. By using the means test, the court ensures Chapter 7 bankruptcy is only for those who really need it.
In Texas, like other states, the means test has two parts: the median income test and the disposable income test. Both are important to determine if you qualify for Chapter 7.
Step 1: The Median Income Test
The first part of the means test is to determine if the individual or household’s income is below the median income for Texas. The median income test compares the filer’s household income to the state’s median income which changes based on the size of the household.
For example, the median income for a household of four in Texas is higher than for a household of one. These numbers change periodically and should be checked before you file. If the household income is below the Texas median, you automatically qualify for Chapter 7 and don’t have to go to the second step of the means test.
Median Income Calculation
To calculate the median income you will need to add up all sources of income for every person in the household for the last 6 months. Then multiply that by 2. Types of income to include:
- Wages or salary
- Self-employment income
- Rental property income
- Unemployment benefits
- Pension and retirement income
- Social Security payments
- Note: Social Security disability income is not included in the means test calculation.
Once the 6 month income is calculated and annualized, the result is compared to the state’s median income for a household of the same size.
Step 2: The Disposable Income Test
If the household income is above the Texas median income, the individual must move to the second part of the test which is the disposable income test. This step is to calculate how much disposable income is left after paying for allowed expenses. These expenses are based on national and local standards which include housing, transportation and food costs as well as necessary medical and childcare expenses.
Allowed Expenses and Deductible Costs
The Internal Revenue Service (IRS) has guidelines on what expenses are allowed when calculating disposable income. These include:
- Housing: Rent or mortgage payments, property taxes and utilities.
- Transportation: Car payments, public transportation costs and vehicle maintenance.
- Healthcare: Medical insurance premiums, prescription costs and necessary treatments not covered by insurance.
- Childcare: Costs associated with daycare, after-school programs or any other necessary childcare.
Once these expenses are subtracted from the household’s income, the court will calculate the disposable income. If the disposable income is low enough you may still qualify for Chapter 7. If the disposable income is above a certain threshold you will likely need to file Chapter 13 which is a repayment plan over 3-5 years.
Special Situations That Affect the Means Test
Certain special situations can allow you to pass the means test even if your income is above the median or your disposable income is too high. Examples of these situations are:
- Job Loss or Reduction in Income: If you recently lost your job or had a significant reduction in income, that can be taken into account even though the means test only looks at the last 6 months of income.
- Medical Expenses: If you have unusually high medical expenses that are necessary and ongoing, those can be included in the means test.
- Involuntary Expenses: If you have expenses that are involuntary, such as child support or alimony payments, those can reduce the disposable income calculation.
- Providing documentation and explanations of these special situations can help you pass the means test and qualify for Chapter 7 bankruptcy.
Exemptions from the Means Test
Not all bankruptcy filers have to take the means test. For example, individuals who have primarily non-consumer debts, such as business debts, are exempt. Also, veterans and active-duty military members are exempt under certain circumstances.
Specifically, disabled veterans who incurred debt while on active duty or performing homeland defense activities are exempt. Individuals who are on active military duty in a combat zone are also exempt from the means test.
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Filing Chapter 13 if You Don’t Pass the Means Test
If you don’t pass the means test, Chapter 13 may still be an option. While Chapter 7 eliminates most unsecured debt without payment, Chapter 13 is a repayment plan based on disposable income over 3-5 years.
In a Chapter 13 bankruptcy, you will need to submit a repayment plan that shows how you intend to pay off your debts. This plan must be approved by the court and will involve paying off secured debts like a mortgage or car loan and a portion of unsecured debts like credit card balances and medical bills.
Chapter 13 doesn’t discharge debt as fast as Chapter 7 but has its own benefits. For example, Chapter 13 allows you to catch up on missed mortgage payments, avoid foreclosure and protect non-exempt assets that would be sold in Chapter 7. Also, if you have too much disposable income to qualify for Chapter 7 bankruptcy you can pay your debts in a structured way that makes it more manageable over time.
Means Test in Texas
For many Texans the means test is a key part of the process to get back on their feet. Whether you qualify for Chapter 7 or Chapter 13, bankruptcy offers significant debt relief. Chapter 7 wipes out most unsecured debt quickly, giving you a fresh start. Chapter 13 is a repayment plan that allows you to catch up on secured debts and pay a portion of your unsecured debts.
Texas being one of the largest states has a higher median income than many other states which makes it easier for some households to qualify for Chapter 7 bankruptcy. But the disposable income test ensures that only those who really need Chapter 7 get the benefit of debt discharge.
Why the Means Test Matters for Texas Bankruptcy Filers
The means test is not just a hoop to jump through; it serves a purpose. By applying the test, the courts ensure that those who have the means to pay their debts do and those who are in dire financial straits can have their debts discharged.
For Texans, passing the means test is the doorway to a fresh start through Chapter 7 bankruptcy and those who don’t pass can still get relief through a Chapter 13 repayment plan. In either case, bankruptcy can give you a chance to rebuild your financial future debt free.
Preparing for the Means Test in Texas
If you’re thinking of filing bankruptcy in Texas, preparing for the means test means gathering all your financial documents such as pay stubs, bank statements and all household expenses. You will need to provide detailed information about your income and expenses and any special circumstances that apply.
It’s highly recommended to consult with a bankruptcy attorney who can guide you through the means test and explain your options. A knowledgeable attorney will make sure your income and expenses are calculated correctly and can advise you on how to qualify for Chapter 7 bankruptcy.
Bottom Line
The means test in Texas is a key part of the process to determine if you qualify for Chapter 7 or Chapter 13 bankruptcy. By looking at income and expenses the test ensures that only those who can’t afford to pay their debts get to discharge them under Chapter 7. Those who don’t pass the means test can still get relief through a Chapter 13 repayment plan.
Navigating the means test can be tricky especially when you have special circumstances and allowed expenses. But with proper preparation and guidance from a bankruptcy attorney many Texans can get relief through bankruptcy and take the first step to rebuild their financial future. Whether Chapter 7 or Chapter 13 bankruptcy can give you a fresh start from overwhelming debt.
Monitoring your credit reports regularly helps you catch these errors early so they don’t do long term damage to your credit score. It also lets you track your progress as you rebuild your credit.
The three major credit bureaus – Equifax, Experian and TransUnion – are required by law to give you a free credit report once a year. Review these reports carefully to make sure the debts discharged through bankruptcy are reported correctly. Any errors should be disputed immediately as they can harm your credit score and delay your progress.