What is the Bankruptcy Means Test in New Jersey?
If you’re researching bankruptcy in New Jersey options, you may have come across the term means test. But what exactly does the bankruptcy means test mean, and why is it so important?
The bankruptcy means test determines whether you qualify for Chapter 7 bankruptcy or if you’ll need to pursue a Chapter 13 repayment plan, and it directly impacts how much you may have to pay your creditors. At the law offices of Lee & Pearlman, our experienced attorneys help individuals and families navigate these complex rules to achieve a financial fresh start.
Why Was the Means Test Introduced?
In 2005, Congress implemented the means test as part of the new bankruptcy laws. Lawmakers were concerned that some individuals, particularly those with middle or higher incomes, were using bankruptcy to discharge debts they could afford to repay. The means test helps ensure that bankruptcy filings are appropriate and fair.
The means test affects:
- Chapter 7 filings: Determine if there is a presumption of abuse.
- Chapter 13 repayment plans: Establishes the length of your plan (3 or 5 years) and calculates the disposable income available for creditors.
It primarily applies to people with consumer debts, such as credit cards or medical bills. Certain debts, like business debts or income taxes, may exempt you from the means test. Additionally, some disabled veterans may qualify for exemptions depending on the type of debt.
How the Bankruptcy Means Test Works
The means test evaluates your household income over the past six months and compares it to the median income for a household of the same size in New Jersey. This calculation considers most forms of income, including:
- Wages and self-employment income
- Rental income
- Alimony
- Pensions
- Unemployment benefits
- Contributions from household members
Social Security income is excluded. If your household income is below the state median, you typically qualify for Chapter 7 bankruptcy or a 3-year Chapter 13 repayment plan.
If your income exceeds the median, the means test calculates your disposable income by subtracting certain allowed expenses based on IRS standards. Standard allowances include costs for:
- Food, clothing, and housekeeping
- Health care
- Transportation
Expenses exceeding these standard amounts, or non-allowable costs like cigarettes, are generally not deductible.
Even if your income is above the median, you may still qualify for Chapter 7 if your disposable income is low. Otherwise, a higher disposable income usually means you’ll need to file for Chapter 13 bankruptcy.
The Impact on Chapter 13 Bankruptcy
If you file for Chapter 13 bankruptcy and your income is above the median, your plan may need to last five years. You may also be required to repay unsecured creditors based on your disposable income over that time.
Timing is critical. A holiday bonus, temporary overtime, or short-term unemployment can alter your income calculation, which may affect whether you qualify for Chapter 7 or must file Chapter 13. This is why careful planning with a qualified New Jersey bankruptcy attorney is essential.
Why the Bankruptcy Means Test Matters
The primary purpose of the means test is to determine:
- If you qualify for Chapter 7 bankruptcy, for a quicker debt discharge
- If you must file Chapter 13 and repay some debts
- How long will your Chapter 13 plan last, and how much must you pay
Understanding the means test ensures you choose the best path to a financial fresh start. At Lee & Pearlman, we help guide you through every step of the bankruptcy process in New Jersey.
Schedule a Consultation Today
If you’re unsure how the bankruptcy means test applies to your situation, reach out to schedule a no-cost consultation with our team of experienced New Jersey bankruptcy attorneys. Remember, contacting an attorney does not obligate you to file—it simply helps you understand your options and find the most effective path toward debt relief.
Learn more about Chapter 7 bankruptcy and Chapter 13 bankruptcy on our website to better understand your options.
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