The Means Test
The Means Test determines whether you are eligible to file under Chapter 7. It is also pertinent to Chapter 13. It is extremely important.
The Means Test was created when Congress revised the Bankruptcy Code in 2005. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors are now required to meet certain income requirements to qualify to file under Chapter 7.
The Means Test: How Does It Work?
The Means Test uses data from the Census Bureau to compare your income to the median family income for households of your size in New Jersey or New York. The data is updated to reflect the current data for median incomes. Therefore, you must ensure that you are using the most recent data available when completing the Means Test.
Calculating Income For The Means Test
To calculate your median income for the Means Test, use the average of all income received during the six months preceding the filing of your bankruptcy petition times 12 to arrive at a median annual income amount.
Examples of sources of income include, but are not limited to:
- Wages and salaries
- Bonuses and commissions
- Net income from operating a business
- Retirement and pension income
- Dividends, interest, and royalties
- Net income from rental property
- Child support and spousal support payments
- Workers’ compensation
- Annuity payments
- Unemployment compensation
- State disability insurance
Income received under the Social Security Act, such as SSI, SSDI, and TANF, may be excluded from the Means Test income requirements, but you need to report this income to your bankruptcy attorney because it can impact your bankruptcy case in some situations.
What Happens If I “Fail” The Means Test
If your median income is above your state’s median income, you “fail” the first section of the Means Test. However, there is a second section of the test.
The second section of the Means Test measures your disposable income. Disposable income is the amount of money remaining each month after payment of allowable living expenses. Allowable expenses used to calculate disposable income for the Means Test are based on the National Standards established by the IRS.
The IRS National Standards for Allowing Living Expenses provides the maximum amount a household should spend on certain living expenses based on the number of people living in the household. The standards are adjusted periodically to reflect current amounts.
For example, as of May 1, 2019, a should of three people is limited to $786 per month for food. If your monthly expenses for food exceeds this amount for a family of three, you must have a valid reason for the higher amount to include it on the Means Test, such as a family member with a special diet because of an illness or health condition. There are also National Standards for clothing, other living expenses, out-of-pocket health care expenses, housing, utilities, and transportation.
Allowable expenses are deducted from your median income to determine the amount of money you have each month to pay debts (your disposable income). Having disposable income does not necessarily mean that you do not qualify to file under Chapter 7. There is a complicated formula for determining whether the amount of disposable income is enough to require you to file a Chapter 13 repayment plan. If there is not enough money to pay a certain percentage to your unsecured creditors, you might still meet the income qualifications for a Chapter 7 case. Also, if your debts are primarily business debts, the Means Test is not applicable.
Seek Assistance From An Experienced Bankruptcy Lawyer
The Means Test can be extremely complicated to complete. A small error on the Means Test could be the difference in filing a Chapter 7 bankruptcy case that is completed in about six months or filing a five-year Chapter 13 repayment plan instead of a three-year plan.
While the rules of the Means Test cannot be modified, an experienced bankruptcy attorney understands how to maximize the allowable monthly expenses to calculate disposable income as much as possible. An attorney with bankruptcy experience also understands the exceptions to the Means Test and if income may be excluded from the Means Test.
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