What Is the Bankruptcy Means Test?
Before you file for Chapter 7 Bankruptcy, you first have to qualify. The test used to qualify for chapter 7 relief is called the “means test.” This test looks at your income, assets, expenses, and determines whether you meet the guidelines to be able to file for chapter 7 bankruptcy. A few of the primary terms to understand in this process are:
“Means Test”: an income and expenses test to determine whether you can file and successfully complete a Chapter 7 case.
“Current Monthly Income”: a very specific way to calculate your income for purposes of the means test. (See Section 101(10A) of the Bankruptcy Code.)
This formula can be complex, and just because you don’t meet the means test doesn’t mean you can’t file for bankruptcy. If you have questions, the best way to get the correct answer specific to the facts of your case is to speak to your bankruptcy attorney.
Chapter 7 Means Test
If your income is less than the median income of your state, then you pass and can file for Chapter 7 Bankruptcy. Each state and county may have different requirements and allowed amounts. Check with your bankruptcy attorney for specific calculations. If you make more than the median, you must continue with the means test. This does not mean that you can’t file for bankruptcy, but you may need to look at a Chapter 13 Bankruptcy or a more complicated bankruptcy option.
What Does the Means Test Calculate?
The means test deducts certain monthly expenses from your monthly income to look at your disposable income. The higher your disposable income, the harder it is to file for chapter 7. There are several calculators that can give you a good idea on what constitutes your disposable income.
However, it is important to remember that these calculators are not completely accurate. Your bankruptcy attorney will have more information on exactly how your income will be calculated.
What If I Don’t Pass the Means Test?
If you do not pass the means test, you may be limited to filing for Chapter 13 Bankruptcy. However, many people who think they may not pass the means test due to income, can pass due to large monthly payments such as mortgages, car loans, medical expenses, and more. The means test can be complex, so even if you think you don’t pass, you should contact an attorney who is experienced with this calculation to make sure and to be aware of all of your options.
Passing the Chapter 7 Means Test Even If Your Income Is Too High
Even if your income is higher than the “median income,” you may still be able to pass the means test by going through the expenses part of the test.
There are a number of ways to pass the means test so that you can file a Chapter 7 case. The easiest way is if your income is no more than the “median income” amount for your state and family size. Your income for this purpose is defined in an unusual and very specific way. But even if your income is higher than the applicable median income, you can often still pass the means test in a couple of other ways.
The Expenses Step of the Means Test
If your income is more than the median income, then the next step is to look at your expenses.
However, it’s not as simple as just looking at your actual expenses. Realize that the point of the means test is to not allow people who have the intend to provide a specific budget of their debt to just draw off all their loans in a Chapter 7 scenario. So in its attempt to meet this purpose, Congress tried to come up with a more objective way to determine people’s allowable expenses. Frankly, Congress didn’t trust people to just make a list of their expenses, thinking they would inflate them to show they had no money left over to pay their creditors.
The Complicated Allowed Expenses
In its attempt to find a more objective or truthful list of expenses, Congress put together a system based on a combination of some standardized expenses along with some of your actual expenses.
The standard expenses get complicated because some are based on national standards and some on local ones. The national standards include food/clothing/housekeeping expenses and out-of-pocket health care costs. The local standards can either be based on your county — such as housing and utility expenses — or on your “Metropolitan Statistical Area/Census Region” — such as vehicle and other transportation expenses.
Your actual expenses are allowed — although often with limitations and/or only with appropriate documentation — for certain taxes, term life insurance, involuntary payroll deductions, child and spousal support and other court-ordered payments, child care, educational expenses for children under 18 years, and charitable contributions. You can also ask for a higher allowance than the standard amounts for food, clothing and home energy, while demonstrating why the higher amounts are reasonable and necessary.
After Listing All Allowed Expenses . . .
There are three more steps:
- After subtracting all the allowed expenses from your “current monthly income,” the balance is your “disposable income.” If you have no disposable income — your allowed expenses exceed your “current monthly income” — then you’ve passed the means test.
- You can still pass the means test even if you DO have some “disposable income” IF the amount is low enough. To determine this, the rules get very specific. If you have a monthly disposable income that is less than $117, you are sure to pass. If the calculated amount is greater than $195 or even more, you do not pass this test, but you can still pass if you follow the next step. If your monthly “disposable income” is somewhere from $117 to $194, then a formula gets applied comparing that amount to the amount of your “general unsecured debts” (debts without collateral that don’t belong to a special set of “priority” debts). If your disposable income is relatively low compared to those debts, indicating that you would not pay that much to them over time, then you can pass the means test.
- If you still do not pass the means test, you aren’t completely out of luck. If you can demonstrate “special circumstances,” you can still pass. You can do that by proving either a) there are other expenses that are necessary and reasonable or b) there needs to be appropriate adjustments to your income that are not accurately reflected in the traditional calculation of your current monthly income.
Calculating My “Current Monthly Income” for the Chapter 7 Means Test
Most people pass the means test simply because their “current monthly income” is low enough. If your “current monthly income” is no more than the specific dollar amount that is applicable to your state and size of family, then you do not need to go through the much more complicated expenses side of the test.
So What’s This Very Specific Way to Calculate Your “Current Monthly Income”?
- Prior 6-calendar-month average: Contrary to what you might expect, it is NOT based on your taxable income for the previous calendar year, or anything that simple. Instead your “current monthly income” is based on the precise amount of income you received during the six full calendar monthsbefore your case is filed. So, for example, if your case is filed on May 25, 2012, we count every dollar you received during the six-month period from November 1, 2011 through April 30, 2012.
- Broad definition of income: The income counted during that six-month period is not just your “taxable income,” but virtually every bit of income you’ve gotten from all sources during those six months. This includes employment income such as your gross salary, wages, bonuses, and tips; business income (gross receipts minus “ordinary and necessary business expenses”); and income from almost all other sources, including child and spousal support, insurance settlements, unemployment benefits, retirement income, cash gifts, and gambling winnings. The exception: exclude all types of Social Security income.
Add up every dollar of applicable income received during the appropriate 6-month period, then take that 6-month total and divide it by six to come up with a monthly average, the “current monthly income.”
Compare Your Income to the Median Income
Now that you have calculated your “current monthly income,” multiply that by 12 to come up with your annual income. The last step is to compare that amount to the median income for your state and your size of family. You can find that median income in the table that you can access through this website. (This median income information was updated on May 1, 2012, but make sure you’re using the current table.)
Here are the current median income amounts for Texas as of May 1, 2012:
* Add $7,500 for each individual more than 4.
If your income, calculated in this precise way, is no greater than the median income amount that applies to your state and family size, then you have secured the means examine hurdle. If your income is MORE than the applicable median amount, you may possibly be capable to file a Chapter 7 case, but that will involve the much more involved expenses side of the means test.
The Purpose of the Means Test
Congress’s clear purpose behind the means test was to make it harder for some people to file for Chapter 7 bankruptcy. The idea was that those who have the need to give a meaningful sum of their debt to their creditors in a three-to-five-year Chapter 13 payment plan ought to do so instead of being allowed to write all of their debts within a Chapter 7 case.
Pass the First Income Part of the Means Test and You’re In
The means test is a messy, multilevel test. The good news for most people is that once they pass the first level — comparing their “current monthly income” to the applicable “median family income” — they don’t have to mess with the rest of the test, particularly the complicated expenses portion of the test. Generally, if your income is no more than the median, then you can file a Chapter 7 case.
Income Not Larger Than the Median Income?
If your annual income is no larger than the median income amounts for your family size in the table, then you have finished the means test over-leap. You can skip the expenses portion of the test.
However, if your income is higher than the median income amount applicable to you, you may very well still be able to pass the means test at the next level. Then you are set to file a Chapter 7 case.