What is the Bankruptcy Means Test and how do I pass it?
What is the bankruptcy means test and how do I pass the means test?
One of the most confusing things about qualifying for a chapter 7 bankruptcy is understanding and passing the means test. The means test was added to the bankruptcy code in October of 2005 in order to determine if a debtor’s income is low enough to file a chapter 7 bankruptcy. Debtors with high income will fail the means test and therefore be forced to file a chapter 13 repayment bankruptcy.
First, the bankruptcy means test only applies to individuals whose debts are primarily consumer debts. Debtors whose debts are business debts do not have to pass the means test.
The first step in calculating the means test is by comparing the debtor’s current gross income with the median income of the same household size of the debtor in the state where the debtor resides. If the debtor is married and living with his or her spouse, the household’s gross income is used even though the spouse may not be filing for bankruptcy. To determine the gross income, the debtor’s six months of income is annualized and then compared to the median income in the state of residence. The current State Median Income by Family Size chart can be see here. If the debtor’s income does not exceed the State’s median income, then the means test analysis is done and the debtor can file for chapter 7 relief. If the debtor’s current income exceeds the State’s median income for the family size, more analysis needs to be done. This is done in order to see if there is enough disposable income in order to fund a chapter 13 repayment plan.
Disposable income is calculated by deducting expenses, some actual and some standardized according to the IRS deductions schedules, from debtor’s income. Generally if the disposable income is at least $207.91 per month, which translates to $12,475 over five years, the debtor will have to file a chapter 13 bankruptcy and pay the disposable income to the chapter 13 trustee for distribution to the creditors. Standardized National and Local deduction schedules can be found here.
Now, to make things even more confusing, what is income for the purposes of the means test? Obviously wages or profit from a business are income. The easier test is to say that any return on your labor and capital are income for the purposes of the means test. But there are other sources of “income” for bankruptcy purposes such as: child support, disability payments, a gift and inheritance. The one rule without an exception is that Social Security Benefits is not considered as “income” for the means test. Depending on the State where the debtor lives, unemployment benefits may or may not be considered as “income” for means test purposes.
As you can see, passing the bankruptcy means test is an important step in qualifying for a chapter 7 bankruptcy. You must talk to a competent chapter 7 attorney before you file bankruptcy. Call or email us for a free consultation to determine if you qualify.