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Bankruptcy Reform: The Means Test 1 (May 9, 2005)

handle is hein.bank/crsbank0009 and id is 1 raw text is: Updated May 9, 2005 Bankruptcy Reform: The Means Test Mark Jickling Specialist in Public Finance Government and Finance Division Summary The Bankruptcy Abuse Prevention and Consumer Protection Act- P. L. 109-8 (S. 256) -was signed into law on April 20, 2005. A key provision of the new law subjects certain petitions for debt relief under Chapter 7 to a means test. Bankruptcy petitioners with relatively high incomes could be prevented from filing under Chapter 7 (where many unsecured debts are discharged, or wiped out, by the court) and instead given the choice of converting to Chapter 13 (where some debt must be repaid out of future income) or having their petitions dismissed and receiving no bankruptcy relief at all. The means test takes into account the petitioner's income, debt burden, and various allowable living expenses, which can vary significantly according to the debtor's place of residence and particular circumstances. If income minus allowable living expenses exceeds certain levels, a Chapter 7 petition is presumed to be abusive. This report sets out the details of the means test calculation. (For a general overview of the bankruptcy reform legislation, see CRS Report RL32765, The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, S. 256, in the 109 Congress, by Robin Jeweler.) This report will be updated if events warrant. Virtually all consumer bankruptcies are either Chapter 7 or Chapter 13 cases. Chapter 7 is the most common form of bankruptcy, accounting for 71.5% of non-business filings in 2004, or over 1.1 million cases. In Chapter 7, the debtor's assets are liquidated and distributed among creditors, and many remaining debts are discharged, or cancelled, leaving the debtor free to make a fresh start. (Some debts are not dischargeable, and secured debts like mortgages are not affected by bankruptcy.) In practice, most Chapter 7 filings are zero asset cases, where unsecured creditors get nothing. (Several types of assets are exempt from liquidation and cannot be distributed to creditors.) In Chapter 13 bankruptcies, debtors with regular incomes agree to a plan to pay back some or all of their debt under court supervision over a period of several years. At the plan's conclusion, remaining debts are discharged. An advantage of Chapter 13 for debtors is that a wider range of debts can be discharged than under Chapter 7. If the debtor is unable to complete the series of payments required by the Chapter 13 plan, the case may be dismissed or converted to Chapter 7. Upon dismissal, remaining debts are Congressional Research Service oe The Library of Congress CRS Report for Congress Received through the CRS Web

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