What Is The Means Test In Bankruptcy Law?
In 2005, the bankruptcy code was changed to create an income test to qualify for a chapter 7 bankruptcy. So, the means test is essentially a lengthy equation to see whether or not your household income and expenses allow you to file for a chapter 7 bankruptcy.
Is The Means Test Taken For All Chapters Of Bankruptcy?
The means test is primarily for chapter 7 cases, but it also plays a role in chapter 13. In chapter 13, the means test allows us to determine whether or not you qualify for a three-year plan as opposed to a five-year plan. It also helps to shape the amount of the monthly payments. In a chapter 13 case, there’s kind of a reverse means test, in which the filer has to show adequate income to be able to support the plan. That is a concept that also applies to chapter 11.
What Are The Income Requirements To Pass The Means Test?
First, we need to define what it means to pass the means test. Normally, the terminology would be that your income is below “the presumption,” meaning that the “presumption of abuse” does or does not apply. If your income is too high, then the presumption of abuse would apply; if your income is not too high, then the presumption would not apply. The means test is basically a two-part test. The first part of the test is just to look flatly at your gross income before deductions in order to see how it compares to the median income in your state (based on household size). So, there are federal standards for how those amounts match up.
Even if you’re a little bit above that median level based on your household size, then the means test allows you to apply series of deductions, which are kind of similar to the deductions that are used on income taxes. So, if you’re a little bit above the threshold, you may still be able to pass the test.
And even if you “fail” the test, in some instances, a filer can still qualify for Chapter 7.
How Do Children Factor In The Means Test?
Children come into play because they affect your household size. The larger your household size, the higher the threshold for the median income based on your household size.
What Are The Allowable Expenses In The Means Test?
If your gross income is above the median, then we look to deduct expenses to see if you can still qualify. Most of those expenses are routine, recurring expenses, such as your mortgage or rent payment, regular payments for food, deductions from your paychecks, insurance, utilities, child care expenses, etc.
How Do Family Support Obligations Figure In The Means Test?
Whether family support obligations are included in the means test depends on how they are treated in your payment plan. Oftentimes, child support can act as a deduction in the means test. Marital support or alimony may be treated differently.
What Is The Marital Deduction Adjustment?
A very common question that we get is how a spouse’s income impacts the means test. When a bankruptcy filer is married, they have the option of filing their case jointly with their spouse. They can also file their case on their own. Even when a married individual files a case on their own, the means test still looks to the total household income as the top of the line figure for analyzing whether or not you meet the qualifications of the test. The marital deduction adjustment is basically a way of saying that if you have to include the spouse’s income in the means test, you also get the benefit of applying their deduction.
What Is The Next Step In My Bankruptcy If I Pass The Means Test?
There are still other considerations in terms of whether or not chapter 7 is the better direction, even if someone passes the means test. But notwithstanding any other factor that would lead away from a chapter 7 case, that filer would want to take the appropriate next steps to put their petition together and get their case filed. Normally, that would mean putting together financial documentation to allow for a completion of the petition.
What Options Do I Have If I Failed The Means Test?
Even if someone does not pass the means test, they could still possibly file a chapter 7 case if there is a good reason for them to stay in chapter 7. Moreover, in some limited circumstances, there can be exceptions where someone may not have to pass the means test at all, and they can still qualify for a chapter 7. So chapter 7 isn’t off the table, even if someone is over the income threshold. Additionally, that individual could look to a chapter 13 case to see whether or not it would benefit them.
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