The Bankruptcy Median Test is the first stage in the Bankruptcy Means Test which was bought in under the Bankruptcy Abuse and Consumer Protection Act of 2005.
The 2005 act was a revision of the 1978 bankruptcy laws and the main thrust was to bear down on debtors who were seeking relief through chapter 7 bankruptcy, when in reality they were thought to have sufficient income to repay at least a portion of their debt to their creditors.
As you probably know, chapter 7 bankruptcy is the most popular form of bankruptcy in the US, accounting for over 90% of bankruptcy filings. The main attraction of chapter 7 is the debtor can get rid of most, if not all, of their debt in return for the court trustee liquidating their non-exempt assets and distributing the proceeds amongst the creditors. Any remaining debt is then discharged, and the debtor is no longer responsible for it. However, the reality is that most chapter 7 bankruptcy cases are what are called "no asset" cases. Generally speaking, the court trustee only liquidate non-exempt assets over certain value and when you combine this with the various exemptions allowed under US bankruptcy law it is rare that the debtor actually loses anything other than liability for their debts.
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However, when filing for chapter 7 bankruptcy the means test is now fact of life and failure of which will result in the case being converted to a chapter 13 bankruptcy, which is a repayment plan where at least a portion of your debts are repaid over a 3 to 5 year period.
If the means test is a very complicated process and it is most important that you hire the services of a bankruptcy lawyer before proceeding.
The first step in the median test is to work out your average monthly income. This is the average monthly income for the six months prior to filing bankruptcy, and the period is measured in whole months. For example if you file bankruptcy in March you take the average of your earnings from the previous September to February.
Income is not simply the amount that you may have earned in salary or wages, but will include any form of income including tax refunds, financial gifts, support payments, retirement income and other areas that your lawyer will advise you on. The median test differs slightly from the means test in calculating your income in that you also have to include the income of your spouse, if you have one, even if they are not filing for bankruptcy. However, if you and your spouse have separated then you only need include the amount of money they contribute to your actual living costs, if any.
Your average monthly income is then compared to the median income for households the same size as yours and in the same state. Obviously these figures will vary depending on state in which you live and are based on the US Census Bureau figures which are adjusted every year to reflect changes in the cost of living.
If you're income is less than the median income for your state you have passed the median test and you can file chapter 7 bankruptcy without having to take the rest of the means test.
If you're income is more than the median income for your state you have fail the median test and will have to take the means test. Be aware that filing the median test by no means means that you will fail the means test.
Your median income also has a bearing if you are filing under chapter 13. Under chapter 13 bankruptcy the bankruptcy court approves a repayment plan where you repay most or all of your debt over a period of 3 to 5 years.
If your monthly income is greater than the median income of your state, then your repayment plan has to run for a full five years.
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