When Congress passed The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (often called BAPCPA), they amended § 707 of the Bankruptcy Code and created a financial eligibility test for debtors looking to file Chapter 7 Bankruptcy. Quite simply, the law imposed a budget test called the “Means Test” to determine if consumers should qualify for Chapter 7 or Chapter 13 Bankruptcy. In this blog, we will explain the calculation and requirements of the Means Test.
The Means Test applies to debtors whose household income is above the median for their household size in that state in which they live. If they are above the median income, then the Means Test will have to be conducted to determine if they are eligible for a Chapter 7 Bankruptcy. Under this fairly rigid test, a debtor is required to substitute most of their actual living expenses with the IRS living expense allowances for the county in which they live. The law does allow some additional expenses, such as mortgage payments, car payments, charitable contributions and child support, but not many others. The Means Test restricts those who do not qualify for Chapter 7 to Chapter 13 Bankruptcy, where the debtor(s) would, in theory, would be able to afford to pay back at least a portion of the debt they owe.
To find out if the Means Test applies in a given case, the debtor’s household income is calculated and compared to the median income for a comparable household in the state in which the debtor resides. To do this, the Current Monthly Income (CMI) for the debtor’s household must first be calculated. The CMI is defined as the total average gross income of the debtor’s household (before taxes) for the past six months. In determining this income, almost any and all income from any source counts as income under the test. The only income that is specifically excluded from the Means Test calculation includes: Social Security Retirement, Social Security Disability, and Supplemental Security Income.
A debtor’s marital status will typically affect the calculation of CMI. If the debtor is married but living in a separate residence from their spouse, only the debtor’s income will go into the CMI. However, if the debtor is married and living in the same household as their spouse, the income of both spouses must be included in the calculation. This is true even if the debtor’s spouse manages their finances separately, pays their own bills and files their taxes separately. The non-filing spouse’s income still must be included.
Often, the non-filing spouse is concerned that their spouse’s bankruptcy filing will affect them. This is typically not the case. Usually, the only imposition on the non-filing spouse (when in the same household as the filing spouse) is that they have to provide income information to determine whether the Means Test applies. The spouse of a debtor who files individually will typically not be affected by the bankruptcy filing, unless they have joint debt or joint non-exempt assets with the filing spouse.
Once the CMI is calculated, it is then compared with the average income for the household size in the state in which the debtor resides. Median income by household size data is compiled by and available from the Office of the U.S. Trustee: https://www.justice.gov/ust/means-testing
Here in New York, the current median household income figures for cases filed on or after 11/1/17, as provided by the Office of the US Trustee, are as follows:
- Household of 1: $52,024
- Household of 2: $66,667
- Household of 3: $79,154
- Household of 4: $96,527
* Add $8,400 for each individual in excess of 4
If a debtor’s household income is less than or equal to the state’s median, the Means Test does not apply and the debtor may qualify for a Chapter 7 bankruptcy. If the debtor earns above the median income for their household size, it is then necessary to calculate the debtor’s disposable income using a formula that measures their CMI against a budget of monthly expenses allowed by the IRS, along with certain other allowed expenses and secured debt payments. The standard expenses in the test are based upon data from the IRS and the Census and may not reflect the reality of a particular debtor’s financial situation. Since the IRS standards are based on geography, under the Means Test, a debtor may qualify for Chapter 7 Bankruptcy in one county with higher living allowances, but not in another.
After deducting all the allowed expenses, including both the allowed actual and standardized expenses, if the debtor’s disposable income is enough to fund a Chapter 13 repayment plan, then the debtor does not qualify for Chapter 7. It is important to remember that the standardized IRS expense allowances used in the test may be less than the debtor’s actual monthly expenses. Many common expenses are not accounted for in the Means Test, for example, retirement loan repayments (for 401k, 403b, or pension loans), student loan debt payments or college tuition, whole life insurance payments or even pet-related expenses. There is one last consideration to be made when analyzing a debtor’s income in the Means Test. If a debtor’s disposable income over the next five years (60 months or the length of a Chapter 13 payment plan) is enough to pay at least 25% of their debts, then they do not qualify for a Chapter 7 Bankruptcy.
It should be noted that while a particular debtor may not qualify for a Chapter 7 Bankruptcy because of the Means Test, they still may want to consider filing a Chapter 13 Bankruptcy. There are many benefits to a Chapter 13 filing including: (1) the debtor receives the Automatic Stay (which ceases collection for the duration of case unless otherwise ordered by the Bankruptcy Court), (2) the debtor can get a 60-month repayment plan (which is interest-free on unsecured debt), (3) if permissible, the debtor may pay less than 100% of the debt owed, (4) the debtor only has to pay back the debt for which the creditor properly files a claim, and (5) debtor obtains a discharge upon completion of the plan (which prevents creditors from coming back and demanding additional payments).
Finally, it should be mentioned that there are two groups of debtors whose income is exempt from the Means Test calculation. First, certain disabled veterans who were recently in deployed or engaged in homeland defense, as defined by the bankruptcy code, and second, debtors who owe mainly business debt (as opposed to consumer debts).
The Means Test can be complex and rather intricate. We do not recommend calculating the Means Test yourself or attempting to do it online. We have seen many incorrect results from clients who attempted to perform the Means Test themselves online. Any debtor who is in contemplation of filing for bankruptcy should speak with an experienced bankruptcy attorney. It should also be noted that just because you earn more than the median income for your household size does not mean that you will necessarily fail the Means Test. If you have any questions about the Means Test or Bankruptcy in general, please feel free to contact the Law Offices of David I Pankin, PC at 888-529-9600 or by using our easy online contact form.