The Short Answer
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) overhauled federal bankruptcy law in the most significant way in decades. The biggest change was the introduction of the Means Test, which compares your household income to your state's median income to determine whether you qualify for Chapter 7. If your income exceeds the median, a detailed calculation of your income and allowable expenses decides whether Chapter 7 is available to you. If you don't pass the Means Test for Chapter 7, you may still be able to file Chapter 13 and pay back only a portion of your unsecured debts.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) is the new bankruptcy laws enacted by Congress and effective October 17, 2005. Although there are many changes within the act, the most talked about is the Means Test. To reduce the number of people filing Chapter 7 bankruptcy, the new bankruptcy laws are established to look at the household income for the person filing bankruptcy compared to the median household income within the state the person resides. For example, if a woman is married with two children, and she needs to file bankruptcy after the loss of her job, the new bankruptcy laws will look at the median household income for a family of four within the state she resides. If the family’s income exceeds the median for the state, a Means Test must be performed to determine if she qualifies to file Chapter 7. The Means Test is a fairly complex calculation of household income from the six months prior to the month of filing bankruptcy less some of the debtors actual expenses along with allowed deduction established along IRS guidelines. Again, the purpose of the new law was to reduce the ease of filing Chapter 7 bankruptcy. In many cases, if you do not qualify for Chapter 7 bankruptcy, you may qualify for Chapter 13 bankruptcy and still pay only a portion of your unsecured debts – credit cards, medical bill, personal loans, etc.
Key Takeaways
- BAPCPA took effect on October 17, 2005, and represents the most sweeping change to U.S. bankruptcy law in modern history.
- The Means Test compares your household income over the six months before filing to the median income for a family of your size in your state.
- If your income exceeds the state median, a more detailed calculation of actual expenses and IRS-allowed deductions determines whether you can file Chapter 7.
- Failing the Means Test does not leave you without options — Chapter 13 bankruptcy may still allow you to discharge a portion of your unsecured debts like credit cards, medical bills, and personal loans.
- The six-month look-back period for income means that timing your filing can matter — a recent job loss or income reduction may affect which chapter you qualify for.
Attorney Insight
The Means Test trips people up more than almost anything else I see — specifically the six-month look-back window. A client who just lost their job last month may still show income that's too high based on what they earned in the prior five months, which can temporarily block them from Chapter 7 even though they're clearly in financial hardship right now. In those situations, waiting a few months to file can make a real difference in which chapter you qualify for. We always run the numbers both ways before recommending when and how to file.
