After you decide you need to begin the process of filing bankruptcy in Michigan, you will likely be subjected to a Means Test, a tool to evaluate whether you are eligible to file based on your income. The United States adopted this method of eligibility testing with the Bankruptcy Reform Act of 2005.
Filing Bankruptcy in Michigan – Chapter 7 and the Means Test
When filing bankruptcy in Michigan under Chapter 7 the means test backtracks and evaluates the 6-month period before you file to eliminate certain debts. In the means test, two variables are compared are your income versus the median household income in your county (relative to your family size). Your eligibility for filing bankruptcy in Michigan depends on whether your income falls above or below that median household income.
For example, if your income is below the median income you may be eligible for filing bankruptcy in Michigan. However, if it is more than the median income, other variables would be taken into consideration to determine your eligibility to file for Chapter 7 bankruptcy.
The Internal Revenue Service (IRS) has created a list of allowances that may be deducted from your income, which includes:
- medical expenses;
- child support;
- telecommunications needs;
- insurance; and
- charitable contributions.
Furthermore, you can subtract payments for loans that are secured such as mortgages and car payments.
Failing the Means Test
Typically, if you end up with about $100 or more after allowable expenses are deducted from your income, you fail the means test. Failing the means test does not automatically rule out your possibility to file Chapter 7, it only suggests that your case should not be approved.
If you fail the means test, your case may be dismissed by the U.S. Trustee. However, your bankruptcy attorney may defend your case by providing evidence of special circumstances such as unexpected medical expenses, student loans or decreased income due to job loss.
Exemption From the Means Test
Not all people filing bankruptcy in Michigan are subject to the means test when they seek to file Chapter 7 bankruptcy. One of the most common reasons the means test is excused is when the debts are not primarily consumer-related debts. Business related debts are also often generally excused from the means test, as are some circumstances for military personnel.
If you are not exempt from the means test and are likely to fail when filing bankruptcy in Michigan with Chapter 7, you may want to discuss the option of filing Chapter 13 bankruptcy instead. An experienced Michigan bankruptcy attorney can help explain and review your options to make an informed decision.
Filing Bankruptcy in Michigan – Chapter 13 and the Means Test
The means test is used for more than determining Chapter 7 eligibility; it is also used in Chapter 13 bankruptcy cases. Most debtors prefer to file Chapter 7 bankruptcy as it eliminates the need for repayment. However, when you have been deemed ineligible to file Chapter 7 due to the means test, Chapter 13 bankruptcy may be your only option.
When applying the means test to filing bankruptcy in Michigan under Chapter 13, the procedure is slightly different. Along with the other deductions, it permits you to include deductions from pension contributions, pension repayments, and administrative expenses.
The amount of income remaining after the means test creates a starting point used to estimate how much unsecured creditors should receive initially under the repayment plan. However, you could be required to pay a greater amount if the remaining income is more than the amount the means test estimated.
Interpreting the Means Test when Filing Bankruptcy in Michigan
Whether it’s a Chapter 7 or Chapter 13 filing for bankruptcy in Michigan, you may need the assistance of a bankruptcy attorney. The means test estimates certain amounts that will be used in further determining your eligibility. However, understanding the means test and the implications of the results may be complicated.
Basically, the means test is a way for the U.S. Trustee to determine if your current income is still substantial enough to be able to repay some of your debts after your expenses are taken into consideration. In general, failing the means test tells the Trustee that you are not in such dire financial straits that you should be wiped clean of debt.
The means test may be interpreted differently across or even within the same jurisdiction because of disagreements on what should be considered as income or allowable expenses. Your Michigan bankruptcy attorney may be able to save you time by evaluating your situation when filing bankruptcy in Michigan and estimating your results for the means test.
A number of factors may affect the means test result, such as your household size, occupation, income, or the time when you are filing bankruptcy in Michigan. Your Michigan bankruptcy attorney may be familiar with the common means test interpretations in Michigan cases. If you are not sure whether you may be eligible for filing bankruptcy in Michigan, it would be in your best interest to contact a bankruptcy attorney.
Hiring a Michigan Bankruptcy Attorney
Filing bankruptcy in Michigan involves multiple stages that require careful analysis and understanding. The circumstances in each case are different and your case may not have the same outcome as the bankruptcy case you read about in the papers or heard about from your business colleague. Therefore, it is recommended that you consult an attorney before acting.