Navigating the Means Test for Bankruptcy Filers in Colorado

The new bankruptcy laws enacted in Colorado in 2005 ushered in the United States Trustee’s Mean Test for bankruptcy debtors intending to file for chapter 7. Under the old bankruptcy laws, debtors could file for chapter 7 without regard to income. But now, the rather strict Means Test is used to determine whether a debtor has disposable income which can instead be paid into a chapter 13 payment plan. The Means Test also looks to determine whether a debtor has a certain amount of non-exempt assets to pay back to unsecured creditors.

There are three primary ways to qualify for chapter 7 under the current Means Test in Colorado. First, you may not even be required to take the Means Test if your Median Family Income, as compared to your family size and state of residence (Colorado), is low enough.

Second, even if the Family Median Income is higher than the basic threshold, a bankruptcy debtor with allowed expenses which are high enough, can take and pass the Means Test.

Third, regardless of your income and family size, the Means Test will not be applicable if more than half of your debts are business debts (many of my clients who are now upside down on the mortgage(s) on multiple rental properties and who subsequently default on the mortgage payment meet this 51% business debt test as mortgages for rental properties are regarded as business debt, not consumer debt).

Put another way, a mortgage on a rental property is deemed to be business debt so, as many real estate investors are upside down on their mortgages, they would qualify for chapter 7 bankruptcy without having to take the Means Test.

Generally, one spouse filing individually is required to include the non-filing spouse’s income for purposes of the qualification under the Means Test.

Those who do not pass the Means Test still may be eligible for a chapter 13 bankruptcy, which involves a monthly payment plan with payments made to unsecured creditors (though the Chapter 13 trustee). For many of my clients in Denver and most of Colorado, chapter 13 is still a great option but, if chapter 7 remains the better option, strategies exist such as adjusting monthly expenses and/or delaying the filing of the bankruptcy petition (as the Means Test only is concerned with income for the six months until filing).