If you have been considering filing for bankruptcy, you’ve probably heard about the “means test,” a requirement for filing Chapter 7 Bankruptcy in US courts.
Bankruptcy, by definition, depends on not having enough money to pay off one’s debts, let alone money to save or spend. Therefore it is a function of total net income, disposable income, and discretionary income, such that the total of one’s bills is greater than their disposable income, the amount that they receive in paychecks after tax withholding. If the remaining amount, the discretionary income, is zero or negative then you are, in fact, bankrupt.
The means test, specified by the Bankruptcy Protection Act of 2005, is an added eligibility requirement to file for bankruptcy, introduced by the Bush administration to make it more difficult for higher-income households to declare bankruptcy and have their debts discharged. Previously, the only requirement was to have negative discretionary income, i.e., more bills than earnings, especially when these bills are related to servicing debts such as mortgage and credit cards. Read more…