Isabella Carter
The means test is a key component of bankruptcy filings, determining eligibility for Chapter 7 or Chapter 13 bankruptcy. Disposable Monthly Income (DMI) is calculated by subtracting allowable expenses and deductions, such as mortgage payments and taxes, from an individual's Current Monthly Income (CMI). While DMI is a factor in Chapter 13 payments, it is less clear how much DMI constitutes eligibility for Chapter 7, as this depends on income compared to the median, with further analysis considering an individual's ability to fund a Chapter 13 plan. The means test is a complex process, and consulting a bankruptcy lawyer is recommended to understand eligibility and navigate the process.
| Characteristics | Values |
|---|---|
| Purpose | To determine eligibility for Chapter 7 bankruptcy or the required payment to unsecured creditors in Chapter 13 |
| Applicability | Individuals with primarily consumer debt; not applicable to businesses |
| Factors Considered | Income, household size, expenses, deductions, and previous income |
| Calculation | DMI = CMI – (National Standards + Local Standards + Other Necessary Expenses + Additional Expenses) |
| DMI and Chapter 7 Qualification | If DMI is negative or below median, the debtor likely qualifies for Chapter 7; if DMI is positive and above median, further analysis is needed |
| Deductions | Mortgage payments, car loans, employment taxes, health insurance, and 401(k) contributions (in Chapter 13 but not Chapter 7) |
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What You'll Learn
Calculating DMI
The Directional Movement Index (DMI) is a technical analysis tool used to identify the direction and strength of a price trend. It was introduced by J. Welles Wilder Jr. in 1978 as an indicator that could measure the strength and direction of a price movement, helping traders avoid false signals. The DMI consists of two components: the Positive Directional Indicator (+DMI) and the Negative Directional Indicator (–DMI).
The +DMI shows the difference between today's high price and yesterday's high price, while the –DMI reflects the difference between today's low price and yesterday's low price. These values are calculated over a period of 14 days and then plotted on a chart.
The specific calculations for the +DMI and –DMI are as follows:
- Positive Directional Movement (+DM) = (Exponential Moving Average of Upward Price Movements) / (Exponential Moving Average of the True Range of Prices)
- Negative Directional Movement (-DM) = (Exponential Moving Average of Downward Price Movements) / (Exponential Moving Average of the True Range of Prices)
The DMI also includes a third line, the Average Directional Index (ADX), which is non-directional but indicates the strength of the price movement. The ADX is calculated using the formula:
ADX = (Exponential Moving Average of ADX from the previous period) x (n+1) / (2 x (Current DX value - Previous ADX value) x n)
Where:
- DX = Directional Index
- N = Time interval
The DMI is calculated by comparing consecutive highs and lows to determine the direction of price movement. This information is then smoothed over a given period to identify the trend direction. The +DI and -DI are plotted along with the ADX to visually represent the trend direction and strength.
It's important to note that the DMI is prone to producing false signals, and traders often combine it with other indicators to enhance accuracy. Additionally, the DMI is part of a larger system called the Average Directional Movement Index (ADX), which measures trend strength. Readings above 20 on the ADX indicate a strong price trend.
Now, regarding your reference to "POA" and "Chapter 7," I found some information about bankruptcy law. In this context, DMI refers to Disposable Monthly Income, which is calculated during a means test to determine an individual's eligibility for Chapter 7 bankruptcy. This DMI value is not directly related to the Directional Movement Index but is instead a measure of income after allowable expenses and deductions.
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Means test
The means test is a formula used to determine whether an individual qualifies for filing for relief in Chapter 7 or Chapter 13 bankruptcy. It was added to the bankruptcy code in 2005 to prevent wealthy debtors from filing for Chapter 7 bankruptcy. Chapter 7 is designed for individuals and couples with limited income and assets, while Chapter 13 is for those who can afford monthly bankruptcy payments.
The first step in the Chapter 7 means test is to compare your income to the median income in your state for families of the same size. This information is published by the Census Bureau and updated annually. If your income is lower than the median, you "pass the means test" and will likely file for Chapter 7 bankruptcy. If your income exceeds the median, further analysis is performed to determine your ability to fund a Chapter 13 plan.
The means test calculation determines a debtor's disposable monthly income (DMI) or how much money they have available to pay their creditors at the end of the month after all necessary expenses are paid. To calculate DMI, four categories of expenses are deducted from the debtor's current monthly income (CMI) or "gross" income:
- National standards: Food, clothing, and other items based on standards set by the IRS.
- Local standards: Housing, utilities, and transportation expenses that vary by location.
- Other necessary expenses: Including employment taxes, mortgage payments, health insurance, and retirement plan contributions.
- Additional expenses: Such as out-of-pocket health care costs.
It is important to note that these allowable expenses may not always reflect a debtor's actual expenses. For example, in Philadelphia, the allowable rental expense for a couple filing jointly is $650, regardless of their actual rent cost.
The means test is a complex part of the bankruptcy filing process, and it is recommended that individuals consult with an experienced bankruptcy lawyer to understand their options and ensure they are taking advantage of all eligible deductions.
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Chapter 7 eligibility
Chapter 7 bankruptcy is a liquidation process where a debtor's non-exempt assets are sold, and the proceeds are used to pay off creditors. To be eligible for Chapter 7 bankruptcy, an individual must satisfy the means test, which assesses financial eligibility by comparing income to the median income of their state for families of the same size.
The first step in the means test is to calculate the debtor's current monthly income (CMI) or "gross" income. From this, allowable expenses and deductions, such as employment taxes, mortgage payments, and health insurance, are subtracted to determine the debtor's disposable monthly income (DMI). The DMI represents the money available to pay unsecured creditors.
If an individual's income is lower than the median, they are likely to qualify for Chapter 7. However, if their income exceeds the median, further analysis is required. This includes considering the debtor's necessary expenses, such as large mortgage or car loan payments, which can increase deductions and potentially help them qualify for Chapter 7.
It is important to note that Chapter 7 eligibility can be complex, and consulting an experienced bankruptcy lawyer is highly recommended to understand all available options. Additionally, Chapter 7 may not be suitable for everyone, as it involves the liquidation of assets, and there are alternatives, such as Chapter 13, which provides a repayment plan for individuals with regular income.
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Chapter 7 bankruptcy basics
Chapter 7 bankruptcy, also known as liquidation bankruptcy, is a common form of bankruptcy available to individuals who cannot make regular monthly payments toward their debts. It is designed for individuals and couples with limited income and assets.
When filing for Chapter 7 bankruptcy, the court automatically places a temporary stay on your debts, stopping debt collection efforts, home foreclosure, wage garnishment, property repossession, eviction, and utility turn-off. A court-appointed trustee is assigned to review your finances, sell your nonexempt property, and use the proceeds to repay your creditors. Exempt property, which varies by state, may include vehicles, homes, jewellery, collectibles, and money in your bank account.
To qualify for Chapter 7 bankruptcy, an individual must pass a means test, which compares their income to the median income in their state for families of the same size. If the individual's income is lower than the median, they pass the test. If their income exceeds the median, further analysis is performed to determine their disposable monthly income (DMI) after allowable expenses and deductions. Some allowable deductions include employment taxes, mortgage payments, and health insurance.
It is important to note that Chapter 7 bankruptcy may result in the loss of property, as the trustee will liquidate nonexempt assets. However, it can provide a quick way to clear away unsecured debts and reset finances.
Before filing, potential debtors should gather their bills, bank statements, tax returns, and proof of all household income for the previous six months. Consulting with an experienced bankruptcy lawyer is highly recommended to understand all available options and navigate the complex means test.
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Chapter 7 vs. Chapter 13
Chapter 7 and Chapter 13 bankruptcy differ in their approaches to eliminating your debt and protecting your assets. Both chapters provide relief from debt and can harm your credit score and ability to borrow money.
Chapter 7 bankruptcy is designed for individuals and couples with limited income and assets. It focuses on discharging unsecured debts such as credit cards, personal loans, and medical bills. Assets valued beyond an exempt amount must be forfeited and sold, and the proceeds are distributed among creditors. Legal fees for Chapter 7 cases must be paid upfront.
To be eligible for Chapter 7, your monthly income must fall below the median for your community. If your income exceeds that amount, you must pass a means test to determine eligibility. The means test calculates your disposable monthly income (DMI) by subtracting allowable expenses and deductions from your current monthly income (CMI). If your DMI is $150, you will pay $150 per month for 60 months in a Chapter 13 bankruptcy. However, 401(k) payments and/or contributions are not allowed as deductions in a Chapter 7 means test.
Chapter 13 bankruptcy, on the other hand, is for individuals who can afford a monthly bankruptcy payment. It allows you to keep your assets but requires you to submit to a repayment plan to pay off your creditors. A bankruptcy trustee collects monthly payments from you for three to five years. Chapter 13 also gives you more flexibility in dealing with certain types of creditors and non-exempt assets. Legal fees may be included in the repayment plan.
In summary, Chapter 7 is generally recommended for those with limited income and assets, seeking a faster and simpler discharge of unsecured debts. Chapter 13 is suitable for those with higher incomes who want to protect their assets and need a more flexible repayment plan to deal with secured and unsecured debts. It is important to consult with a bankruptcy attorney to determine the best course of action.
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Frequently asked questions
The means test was added to the bankruptcy code in October 2005 to create objective standards for determining who qualifies for filing for relief in Chapter 7 vs. Chapter 13 bankruptcy.
Your DMI is calculated by subtracting some allowable expenses and deductions from your current monthly income (CMI). Some allowable deductions and expenses include employment taxes, mortgage payments, and health insurance.
Your DMI is used in the means test to determine if you qualify for Chapter 7 bankruptcy. If your income is lower than the median, you will likely pass the means test and file for Chapter 7. If your income exceeds the median, further analysis is performed to assess your ability to fund a Chapter 13 plan.
It is important to note that allowable expenses and deductions may not always reflect your actual expenses. Additionally, certain factors like large mortgage or car loan payments can be advantageous for Chapter 7 qualification due to larger deductions. Consulting with a bankruptcy lawyer is recommended to understand your specific situation.
