What is a Means Test?
In 2005 Congress enacted changes to the bankruptcy code. These changes were intended to make bankruptcy harder. To make it harder, and more helpful to creditors, Congress developed a Means Test to determine whether a debtor can file for Chapter 7 bankruptcy protection. Debtors deemed ineligible for Chapter 7 are often forced to file a Chapter 13 instead. Unfortunately, the 2005 bankruptcy changes were designed to protect creditors at the expense of debtors. The Means Test is one way Congress made bankruptcy harder.
The Means Test is a series of calculations that includes a debtor’s rolling, 6-month income average and reasonable expenses both based on government standards. The income/expense calculations are complicated, and the standards are adjusted regularly. Consultation with an experienced attorney who handles bankruptcy is highly recommended to understand and properly apply the Means Test.
How is the Means Test Applied?
First, a determination must be made as to whether the majority of unsecured debt is business or consumer debt. Some consumer debts include, but are not limited to, credit cards, mortgages, auto loan deficiencies, payday loans, and utilities. If your debts are primarily business debts, then you will not be subject to mean testing.
Next, your income is compared to your state’s median income where you have resided. Almost all income generated during the six months prior to filing bankruptcy is measured by the Means Test. Income generally includes: wages from a job, wages from self-employment, tips and gratuities, spousal and child support, and pension or retirement income. If you have a non-filing spouse, income also includes his or her income contributed towards general household expenses.
Social security income, disability income, and possibly unemployment compensation may generally not be included in Means Test calculations. You should consult with us to determine whether unemployment is included, as this varies from court to court and state to state.
If your monthly income is less than your state’s median income, eligibility for Chapter 7 can be established and no further calculations are generally required. Otherwise, another set of calculations is necessary.
A series of deductions is then subtracted from the debtor’s monthly income to determine disposable income. These deductions include taxes, clothing, food, housing, transportation utilities, insurance, medical bills, reasonable recreation, charitable contributions, etc. However, these expenses may be capped by reasonable standards adopted by the government based upon changing trends.
Once all reasonable deductions are subtracted from income, surplus monthly income is then referred to as Disposable Monthly Income (DMI). Your DMI is multiplied by 60 (representing a theoretical 60-month repayment plan). If this value is greater than 25 percent of total debts, you may be ineligible for Chapter 7.
Completing a Means Test can be a daunting and complicated task. We can help determine the calculations and ensure the best possible outcomes for your bankruptcy.