Chapter 7 Bankruptcy in Texas: The Means Test

Dallas Attorney Explains How to Tell if You Qualify

Video Transcript:

David Shuster:

Don't just think that if you make a certain amount of money that you don't qualify for the Chapter 7.

Rob Rosenthal:

Do you know what the means test is when it comes to qualifying for bankruptcy? Well, we're going to find out right now because that's what we're going to ask the lawyer.

Hi again, everybody. I’m Rob Rosenthal with askthelawyers.com. My guest is Dallas attorney David Shuster. Before we get into the questions, I want to remind everyone; if you want to ask questions about your specific situation, just head over to askthelawyers.com, click the button at the top of the page that says “Ask a Lawyer”, and you can do your asking right there.

David good to see again as always. Thank you for helping us out.

David Shuster:

Yeah, likewise Rob. Thank you.

Rob Rosenthal:

So start at the beginning, what is the means test? And what does it tell you?

David Shuster:

The means test tells you, essentially, if you have the means to repay creditors. It's a formula that was put into the law and has been around at least since 2005, and this thing will determine if you have the means to repay creditors or if you will be eligible for a Chapter 7 fresh start without having to repay creditors any of your income.

Rob Rosenthal:

So there are two parts to the means test. Does somebody have to pass both parts in order to qualify?

David Shuster:

Well, essentially, no. If you pass the first part, you're good if you are a household of four. When I say a household of four, they have to be occupants of your house, but it doesn't necessarily have to be a spouse and two kids, the nuclear family; it can be that your brother moved in, that your mother-in-law moved in, your child moved from college and you're helping them out, but as long as they're not contributing to the household expenses, and they are in fact dependants in your household—they like to call them heads on beds. So if you got four people in your house, four heads on the bed that you're essentially responsible for supporting, then you can make up to $88,000 in Denton County, and that passes the first part of the means test if your total gross income does not exceed $88,000, for example.

Rob Rosenthal:

And what about part two? What is part two?

David Shuster:

Well, if it does, then it doesn't mean that you're not eligible. So it's a good threshold determinate—and by the way, this is based on the last six months of income. So if you have a six months income of $88,000 gross or less, you know, “Oh, okay. Well, I can do this Chapter 7 thing. There are no further complex considerations for me.” But if you make more than that, and even if you make a lot more than that, let's say $120,000, or if you and your spouse both work and you make $140,000, okay, so the point is you're above the threshold level. There's a lot of other detailed expenses that this formula allows you to deduct to then qualify you for the Chapter 7. So that's the kind of thing you're going to have to walk through with an attorney to do this.

What I like to tell clients, Rob, is don't just think that if you make a certain amount of money that you don't qualify for the Chapter 7; there's a lot more involved and there's a lot more to talk through, and these expenses are very specific. They include things like child support, child care, medical support of an elderly family member; so there are all kinds of things to consider—expenses that are necessary that you can use to deduct.

The theory behind it is great. Is it better as a society for your family to be taking care of medical expenses, taking care of necessary cost of living, instead of trying to repay unsecured debt? Yes, it is; it's better. So that's why when you carefully go through these expenses, if you have them, you can then qualify. So therefore you can take care of yourself and your household and not have to try to bury yourself to try to get out of some old debt that you had maybe when you were unemployed for a while, or whatever the case may be.

Rob Rosenthal:

And you alluded to this already, but with either one of the tests is that the kind of thing somebody should try to do themselves, the means test? Or is it just the thing that you really need somebody who knows the ins and outs?

David Shuster:

Well, like I said, Rob; if you Google, if you put in your salary, you figure out the household size and your county and the threshold level, then you pretty much know, “Okay, well now I just need to find an attorney for a Chapter 7.” And there's not a whole lot of consideration. However, yes, if you are above that level don't stop there and assume that you don't qualify, but rather call an attorney and say, “What will it take for me to go through the second part of the means test with you?” We offer a special where we can take a certain amount down, typically $300, and we can take the last six months’ income, do a full analysis, and this usually includes two consultations to determine where you stand. If you don't qualify for the Chapter 7, you do have remedies obviously, it doesn't stop there. There’s Chapter 13, which is a debt reorganization plan. Depending on the stage you’re at with the creditor, we can begin to assist you with settling the debts as well, because if you don't qualify for the Chapter 7, you're not interested in the reorganization plan for whatever reason, then the debt settlement option is good and it's better to use an attorney than some company. You want somebody local you can talk to that will help you out, especially if you happen to get sued by one of the creditors.

Rob Rosenthal:

You mentioned a little while ago a “fresh start” bankruptcy. Tell me what that is. What does that mean?

David Shuster:

Well, that is the best get-out-of-debt plan, Rob—that is if you can pass the means test, if you can essentially pass one of the portions of the means test and get through it, you're out of debt without paying back any creditor at all, because under the law you're not legally obligated to. That's what that means. People always want to do the right thing; they want to repay their debt, but if you're not legally required to do so because you have expenses that authorize you to get this discharge, then that's what you're looking at; in 90 days you’re out of debt. Your fresh start bankruptcy is done within three months, you can get back to a 700 credit score even, frankly before the discharge is done if not within a month or two afterwards. It hasn't always been that way now, but speaking in terms of right now it is a quick rebuild process. You can get credit cards right away, and essentially you'll be off and running within at least six months to a year of that Chapter 7.

Rob Rosenthal:

So touch on it again, David. What is the process if someone wants to get the means test started with your office. What's that process like?

David Shuster:

Just give me a call, and if we determine right away that you're sort of more of a complex means test, and you do exceed that threshold level by not just a little bit but enough where we're going to have to walk through it and probably talk to both spouses—if there are two spouses—and get detailed information for the last six months, then we can actually do a quick $300 retainer fee after that initial consultation and then schedule a follow-up to discuss the results of the means test, where you stand, and what your options are without committing you to anything.

Rob Rosenthal:

Great. Lots of great information as always, David. Thank you so much for making some time to answer our questions.

David Shuster:

Thank you, I appreciate it.

Rob Rosenthal:

That'll do it for this episode of Ask the Lawyer. My guest has been Dallas attorney David Shuster. Remember, if you want to ask questions about your specific situation, head over to askthelawyers.com, go to the button at the top of the page that says “Ask a Lawyer”, and click on that button so you can do it right there. Thanks for watching, everybody. I'm Rob Rosenthal with AskTheLawyers™.

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