Deciding to file for bankruptcy is a big step that can help you get on the road to financial recovery. However, there are steps you must take to show the U.S. Courts that you are eligible to file.

One big step is a bankruptcy means test, which you must pass to file for Chapter 7 bankruptcy. Chapter 13 does not have a means test. However, you are required to go through a similar process to show you have enough disposable income to make payments.

This guide will help you understand the means test and how it can impact your filing.

What is the bankruptcy means test?

The means test became a required part of the filing process in 2005 after Congress passed the Bankruptcy Abuse and Prevention and Consumer Protection Act. The goal is to prevent people from abusing personal bankruptcy by requiring them to demonstrate that they have a legitimate need for relief. Essentially, the courts want to ensure you aren’t using Chapter 7 bankruptcy as an “easy way out” when you have the means to pay off your debt.

That may sound scary. However, in reality, if you have been struggling to stay afloat and can’t make headway paying off your debt, then it’s likely that you’ll pass without any issue. Still, it’s crucial that you complete the means test correctly to ensure your bankruptcy case can proceed without any issues. Having a qualified bankruptcy attorney on your side to help can be imperative.

Steve Rhode, the Get Out of Debt Guy and a member of Debt.com’s Ask the Expert panel explains it like this:

“It would be incorrect to think that the means test is a hard and fast calculator, where you punch in the numbers and it spits out a yes or no answer. In fact, the way the calculation is completed by a bankruptcy attorney is more art than science. The means test calculation is another one of those areas where when someone files on their own, they don’t have enough experience to make the nuanced decisions that are required.”Steve Rhode
With that in mind, what you are about to read describes the factors that go into the means test calculation. However, the nuance comes in what is or is not weighted or factored into the categories described.

How does the means test work?

The means test is required to file Chapter 7 bankruptcy in most cases. There are some exceptions where you are not required to file that we explain below.

Keep in mind that there’s a lot of paperwork involved in completing the means test and it can be complicated and confusing. That’s why we highly recommended that you work with a qualified bankruptcy attorney to file.

“Filing this paperwork incorrectly could lead to your case getting thrown out or forcing you to file a three- to five-year repayment plan instead of qualifying for a 90-day discharge with Chapter 7 bankruptcy,” Rhode explains. “Getting it wrong has real consequences.

Here is what you and your attorney will submit to show you are eligible to file.

Completing a Chapter 7 means test

For a Chapter 7 bankruptcy, the means test shows that you do not have enough disposable income to pay off your debt on a Chapter 13 repayment plan.

Step 1: Compare your current monthly income to the median family income in your state

First, you must complete Chapter 7 Statement of Your Current Monthly Income (Official Form 122A-1). This totals up all the monthly income you receive as a household, including:

  • Wages, tips, bonuses, and commissions
  • Support, such as child support or alimony
  • Income from a business
  • Rental and property income
  • Interest, dividends, and royalties
  • Unemployment benefits
  • Retirement income

You will also note the state where you live and your family size. That will determine the median family income that’s compared to your CMI.

If your annualized CMI is less than the designated median family income, you sign the form and you’re done. There’s no presumption of abuse, so you can move forward with filing Chapter 7.

On the other hand, if your annualized CMI is more than the designated median family income, then there’s more paperwork that must be completed.

Step 2: Completing the means test calculation

This step is required when your current monthly income (CMI) exceeds the median family income in your state. It confirms for the courts that even though your income is higher, your liabilities (debts) and expense are such that you’re legitimately facing financial hardship.

To do this, you and your attorney will complete the Chapter 7 Means Test Calculation (Official Form 122A-2). This form reaffirms your income and then details:

  1. The number of people used in determining deductions from your income (i.e. the number of people you claim as dependents)
  2. Expenses for food, clothing, and other essentials for each person in your household
  3. Out-of-pocket healthcare costs
  4. Insurance
  5. Housing and utility expenses
  6. Transportation expenses
  7. Taxes
  8. Court-ordered payments
  9. Childcare
  10. Telecommunication costs
  11. Education costs
  12. Donations
  13. Secured debt payments

To reiterate, all of this requires highly accurate reporting and it’s not as simple as just referring to your budget or bank account statements. You must use the IRS National and Local Standards to determine what the government thinks you should be paying for any calculated expenses. You also then detail additional payments you make above those thresholds.

Based on all these numbers, you calculate your disposable income and then affirm whether or not you would be eligible to file Chapter 13. You sign the form and your attorney will submit to the court.

Step 3: A trustee reviews the information you provide

Once all the forms are completed, a trustee appointed by the court will review the information you provide. Based on their findings, there can be two outcomes:

  1. You pass: The trustee affirms you are eligible to file for Chapter 7 bankruptcy and your filing can proceed.
  2. You fail: There is a presumption of abuse, which means the trustee determines you have sufficient income for a Chapter 13 repayment plan.

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Chapter 13’s variation of the means test

For Chapter 13 bankruptcy, you must demonstrate that have the disposable income necessary to enter a repayment plan. The paperwork and process are similar to the Chapter 7 means test. This will also determine the length of your repayment plan.

Step 1: Calculate your current monthly income and your commitment period

First, you must complete a Chapter 13 Statement of Your Current Monthly Income and Calculation of Commitment Period (Official Form 122C-1). This form:

  1. Determines your current monthly income (CMI) earned from:
    1. Wages, tips, bonuses, and commissions
    2. Support, such as child support or alimony
    3. Income from a business
    4. Rental and property income
    5. Interest, dividends, and royalties
    6. Unemployment benefits
    7. Retirement income
  2. Compares your annualized current income to the median income for a family of your size in your state.
  3. Calculates whether you must commit to a 3-year repayment period or a 5-year payment period

If your current monthly income is less than the median family income in your state, then you’re done; you will go straight to submit the statement to the court. If your income is more than that amount, then you must move on to step two and complete another form.

Step 2: Calculating your disposable income and projected plan payment

If your income is higher than the median income in your state for a family of your size, you must complete the Chapter 13 Calculation of Your Disposable Income form (Official Form 122C-2) to file.

Disposable income is the income you have left once all taxes, deductions, and necessary expenses are paid. As with the Chapter 7 means test, this is not determined by the actual values for these expenses in your budget. Instead, you must refer to the IRS National and Local Standards.

Expenses will include:

  1. Food, clothing, and other essentials for each person in your household
  2. Out-of-pocket healthcare costs
  3. Insurance
  4. Housing and utility expenses
  5. Transportation expenses
  6. Taxes
  7. Court-ordered payments
  8. Childcare
  9. Telecommunication costs
  10. Education costs
  11. Donations
  12. Secured debt payments

Once you determine the disposable income you have available, then you calculate your projected monthly Chapter 13 plan payments.  Getting this calculation right is crucial because if you can’t afford the payments, your case could get thrown out.

Step 3: Submit your information to the courts for review

The court will assign your case to a U.S. bankruptcy trustee. They will review the information provided to ensure you have the disposable income necessary to enter a repayment plan. Once that is confirmed, they will arrange a meeting with your creditors to discuss your payment plan.

If you do not have enough disposable income to make payments, then you will not be eligible to file Chapter 13 bankruptcy. Instead, you may need to convert your filing to Chapter 7. In most cases, that’s actually good news. You will be able to receive discharge faster, within 90-120 days rather than 3-5 years.

Median income based on state and family size

The median income in the state where you file is crucial to your bankruptcy case. Both the means test for Chapter 7 and the disposable income calculation for Chapter 13 depend on it. Your family size also affects the median income used in these tests. The larger your family, the higher the median income threshold will be.

This map shows the median income for 2020 by state for individuals. You can also hover over or click on your state to see the median income for a family of two, three, or four. Median income is determined using U.S. Census Bureau data.

Understanding current monthly income (CMI)

Current monthly income (CMI) is a critical calculation that will determine your eligibility to file bankruptcy. You calculate CMI based on the monthly income you’ve received from all qualified income sources over the six-month period ending the month before you file. This is known as the lookback period.

Let’s say you file for bankruptcy in July. Then the lookback period would evaluate your income from January 1 to June 30.

What income sources that count towards CMI

These income sources count in CMI calculations:

  • Wages, tips, bonuses, overtime, and commissions (gross – i.e. pre-tax)
  • Support, such as child support or alimony, and contributions from another person for household expenses, such as an adult child
  • Income from a business, profession, or farm
  • Rental and property income
  • Interest, dividends, and royalties
  • Unemployment benefits
  • Retirement and pension income
  • Other income sources that are not excluded

There are some income sources that are not part of the CMI calculation. The most common is any benefits receive through Social Security, such as SSI and Social Security disability payments.

Why CMI calculations can get tricky

Calculating CMI isn’t always as straightforward as it sounds, which is why working with a qualified bankruptcy attorney is so beneficial. Here are some examples of how CMI can get complicated:

  • Your spouse’s income and contributions count towards CMI differently depending on if you file for bankruptcy individually or jointly.
  • Disability benefits from Social Security don’t count towards CMI, but state disability payments do.
  • There are special income sources that most people never consider. For instance, if you receive payments because you were a victim of domestic terrorism or a crime against humanity, that income is excluded.

Timing your filing may also be crucial for getting the best CMI calculation. For example, if you have seasonal income, then you want to time your filing, so the calculation happens when your income is low, rather than high. Otherwise, you could be ruled ineligible to file Chapter 7, or you may not be able to make the payments for Chapter 13.

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Means test exemptions

There are certain situations where you may be exempt from taking a means test.

You’re a disabled Veteran or on active-duty military service

The Servicemembers Civil Relief Act provides two key means test exemptions:

  1. Disabled Veterans are exempt if the debts were primarily incurred while the Veteran served on active duty or while performing a homeland defense activity.
  2. Service Members, Reservists, and National Guard Members are exempt when serving on active duty or while performing a homeland defense activity for at least 90 days. The exemption lasts from 540 days after the completion of that service.

Your debt is primarily business debt

If the primary source of debt that led to your filing is business debt, then you are not required to submit to the means test. Business debt is defined as any debt incurred with the intention of making a profit.

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Article last modified on October 22, 2020. Published by Debt.com, LLC