Florida Bankruptcy Guide: Step 2 - Which Chapter? (The Means Test)
Guide to Filing Bankruptcy in Southwest Florida
—From the Debtor’s Perspective—
What Can I Expect? What is the Process?
Which Chapter Should I Choose?
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Life After Bankruptcy
Christopher D. Smith
Attorney at Law
The Means Test
What is the “Means Test" and who can qualify for a Chapter 7 bankruptcy?
The bankruptcy courts (and the Department of Justice) will use a formula called the “means test" to determine if you qualify for a Chapter 7 bankruptcy. The purpose of this test is to limit the use and availability of Chapter 7 bankruptcies to those who do not have the “means" (income) to pay back their creditors. The means test formula considers measures of income and allowable expenses. You may not be eligible for a Chapter 7 bankruptcy if, according to the results of the test, it is shown that you have sufficient net monthly income to repay some of your debts. If you do not qualify for a Chapter 7 based on the results of this test, you may still be eligible for relief in a Chapter 11 or 13 bankruptcy.
The means test is embodied in a form called a B-22A. Click here for a copy. This is a very complex form, and there are many judicial decisions that interpret what numbers can go into this form and what deductions a debtor can claim. Further, if you pass the means test, the Department of Justice may still object to your Chapter 7 if it feels you still have substantial income to pay back your creditors through a Chapter 11 or 13. If you attempt to file your case without counsel, the means test is the single-most challenging aspect of your case, and the one form you will most likely prepare incorrectly.
You will almost always pass the means test if your income is below the median income for Florida. Income is measured as the average household income over the prior six months, then annualized. In practice, this means that your income for the last six months is doubled to determine your means test income. Thankfully, Social Security income is not counted toward this calculation, but nearly all other sources of income are counted, including gifts from friends and family (which we call “contributions to household income.") If you exceed the median income, you can still pass the means test in some cases if your allowable expenses reduce your disposable income to a very low amount. However, the more you exceed the median income, the more likely the US Trustee will push to have you convert to a Chapter 11 or 13.
Smart Means Test Practices
You should be smart with your claimed expenses and avoid fluff. The US Trustee’s office is staffed by highly capable attorneys, accountants and examiners who have seen tens of thousands of cases and are highly aware of all the tricks that some unscrupulous debtors might try to use to pass the means test, and are always on the lookout for fluff numbers. Some smart practices:
- Unless you have solid documentation to back it up and a long history of donations, you should avoid claiming significant charitable contributions on line 45. These are not looked upon favorably.
- Avoid claiming the extra 5% food deduction on line 44, since those are viewed with skepticism.
- Out-of-pocket medical expenses (line 24Y) exceeding the average allowance ($60/m for non-seniors, $144/m for seniors) must be supported by credible documentation, or they may be challenged.
- Lines 26 and 42 allow for extra deductions for housing expenses beyond the allowances, and line 26 can be used to include HOA expenses. However, I recommend not using these to state exceptionally large utility bills unless you can support with credible documentation. There are not favorably viewed.
- Lines 28 and 29 are a hot topic for Chapter 7s. If you have a lien on your car(s) or lease your car(s), then claiming the ownership expense is always acceptable. However, if you do not have a lien (i.e., car payment) or lease, then there is the possibility that these expenses could be challenged. You can never claim these expenses in a Chapter 13 unless you have a lien or lease.
- I would avoid claiming anything on line 37 for health-related telecommunication charges.
- Line 35 can be very helpful to above-median income families with small children, but have credible documentation to support your deductions.
- Line 30 for taxes is very difficult. Taxes change every year, and your effective tax rate changes depending on your IRS deductions, exemptions, allowances, etc. If your income is steady, then I recommend using your prior year’s effective tax rate plus the FICA rate (usually 6.2%, but temporarily 4.2%) multiplied by your monthly income for this calculation. The uncertainly in the tax calculation makes this line the single most “fluffy" deduction, so it may be helpful to get an opinion from your accountant as to your expected effective tax rate for the current year to use for this calculation. The US Trustee will likely respect the written opinion of a credible CPA, within reasonable limits.
- Line 40 regarding care and support of elderly or ill family members is a potentially valuable offset, but requires extensive documentation and a payment history to support the deduction.
- I have never once seen line 41 claimed, and is almost never applicable.
- Line 43 for educational expenses is valuable, but it is capped at $147.92 per child, and is not applicable to college expenses. This cannot be used for daycare (use line 35 instead).
- Line 57 for special circumstances is obviously going to be looked at closely and with heavy skepticism. I would avoid using this line if possible.