Bankruptcy Means Test Case Study

This is the bankruptcy means test case study for Mr. J. who resides in Grayslake, Illinois. He is in the office to determine whether or not he can qualify for chapter 7 bankruptcy relief. Since his income is technically over the state median, we are not able to guarantee eligibility for chapter 7 without undergoing the mathematical formula known as the means test. This case study will explain why we need the means test and how we determine whether or not this person can qualify for accuracy under chapter 7.

He currently is a homeowner with a market value of $115,000. The outstanding loan owed to Ocwen Loan Servicing totals $82,000. Although there is some equity in the property, I do not believe that there would be anything available for creditors should the property be liquidated. His monthly mortgage payment is $940 and he is current on his payments. He has a 2005 Jeep Wrangler, which is paid in full valued at $2000. He also has a 2001 Toyota Celica, financed by American Eagle with a value of $1000. The outstanding debt on that vehicle is 4100 and he intends on keeping it and reaffirming the debt. He has a checking account and a savings account at US Bank. He has household goods which he values at $2000. He has clothing which he values at $3000. He has a term life insurance policy with a death benefit only. He has retirement accounts protected under existing law valued at $160,000. He also owns $1500 worth of basic stock.

He is currently single and he is working as a superintendant. His yearly income is $50,000. His monthly net take-home pay is $3200. In terms of expenses, he pays $937 per month for his mortgage. His real estate taxes and mortgage insurance are included in that payment. His water, sewer and trash is $70 per month. His electricity and gas averages $250 per month. His cellular phone is $25 per month. He spends $600 per month in food. He spends $151 per month for chiropractic care. His transportation budget is $200 per month. His auto insurance is $200 per month. His auto payment is $157 per month. He has student loans in which he pays $400 per month. When looking at his income minus his expenses, it appears that there is no available money for which to fund a chapter 13 plan.

His summary of financial affairs states that in the past three years he is earned anywhere from $48,000-$51,000 per year. He is not currently being sued. He has not given back any property. He has not closed a bank account in the last three years. He does not own a safe deposit box. He does owe student loans to the department of education totaling $25,000. He also has $20,000 worth of credit card debt and a personal loan where he owes $8000.

Obviously, he would benefit from the fresh start in that he would only owe his mortgage, his auto loan, and his student loan going forward. He would be able to eliminate the credit card debt and the personal loans should he qualify for chapter 7. Since his income was over the state median for his family size, we have to undergo the means test. The means test is the mathematical formula whereby his income and expenses are put into a software program that provides for the allowable deductions under IRS standards. This software will enable us to determine whether or not he qualifies for chapter 7. If he does not qualify for chapter 7, we will be able to recommend a chapter 13 bankruptcy with a very low payment amount.

In summary, if you are making more than the state median, then it is really difficult to receive a determination with regard to bankruptcy without further review. The software is very comprehensive and within a matter of one to two hours, the law firm should be able to tell you whether or not you pass the means test. If you do pass, chapter 7 would be the best option.  That is our hope for Mr. J, from Grayslake, Illinois.

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