Means Test Basics

Ronald Wayne Holland

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Bankruptcy Attorney

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# The “means test" is used by the courts to determine eligibility for Chapter 7 or Chapter 13 bankruptcy and can be very complicated if you are not familiar with all of the in’s and out’s of the calculations required by the Bankruptcy Code. To apply the means test, courts first look at the debtor's average income for the 6 months prior to filing and compare it to the median income for that state. If the income is below the median, then Chapter 7 is open as an option. If the income exceeds the median, the remaining parts of the means test comes into play. If the average income, as calculated by the first part of the Means Test, the next step in the calculation is required. That part takes income, less living expenses (excluding payments on the debts included in the bankruptcy), and multiplies that figure times 60. This represents the amount of income available over a 5-year period for repayment of the debt obligations. The expenses that are used are based on a modified IRS standard. If the income available for debt repayment over that 5-year period is $10,000 or more, then Chapter 13 will most likely be required. While someone earning above the state median, and with at least $166.67 per month of available income, will not automatically be denied Chapter 7, the Bankruptcy Code says that there is a "presumption of abuse" of the bankruptcy process. If a chapter 7 case is filed under those circumstances, the case will be subject to close scrutiny and might be dismissed. So for example, if the court determines that you have $200 per month income above the IRS standard of living expenses, $200 times 60 is $12,000. Since $12,000 is above $10,000, you're either stuck with Chapter 13 or, if you file under Chapter 7, you may have to prove why your case should not be dismissed by the court. The standards for the Means Test can be complicated, especially when it comes to allowable expenses. In some cases, even determining whether something is "income" can be tricky. Certainly, the timing of filing has a lot to do with this analysis. Also, once it appears that there is a presumption of abuse and a Chapter 7 case appears headed for dismissal, knowing the standards of making that determination are extremely important. It is vital for a debtor that just cannot afford to fund a case under Chapter 13, but appears to "fail" the Means Test for Chapter 7 to have an attorney experienced in this important area. What happens if you are above the median income but do NOT have at least $166.67 per month to pay toward your debts? Then the final part of the means test is applied. If the available income is less than $100 per month, then Chapter 7 again becomes an option. If the available income is between $100 and $166.66, then it is measured against the debt as a percentage, with 25% being the benchmark. A big problem for most consumers is that their household budgets will not reflect the IRS approved numbers. So even if you think you are able to file Chapter 7 because you don't have $100 per month to spare, the court may rule otherwise and still force you into Chapter 13 because some of your actual expenses may be disallowed. As stated above, the amount of monthly income available toward repaying your debt, is determined by subtracting living expenses from income. However, the figures used by the court for living expenses are NOT your actual documented living expenses, but rather the schedules used by the IRS in the collection of taxes.

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