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Bankruptcy Means Test May Harm Debtors During Recession

Posted By admin || 27-Feb-2009

When debtors file for bankruptcy, they are required to take a means test which will determine if their income is 1) above or below the median income of that state and 2) if they have enough income to repay at least some of their debts. The test is based on the debtor's income from the prior six months before they filed for bankruptcy. Unfortunately, if a debtor has recently lost their job, that means test may be inaccurate because they no longer have the income and may not find another job within timely a manner. The means test during a recession may be particularly devastating for the self-employed who often experience widely changing income levels especially during economic hard times.

The other issue with the means test is that if the economy declines enough there may be a point where the state's median income declines putting more debtor's above the median income threshold. For example, if a debtor is earning $25,000 a year and the median income is $26,000 he/she would fall below the median income threshold qualifying for Chapter 7 Bankruptcy . But if the state's median income declines, to $24,000, that same debtor would not qualify for Chapter 7 bankruptcy although his/her daily expenses most likely have not changed. Because of the vulnerability of debtors taking the means test during a recession, our bankruptcy courts need to take measures that insure that all of these factors are taken into account as they determine who qualifies for Chapter 7 bankruptcy using the means test.

Categories: Bankruptcy
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