Understanding the Means Test in Chapter 7 Bankruptcy
In order to qualify to file under Chapter 7 of the U.S. Bankruptcy Code, Debtors must first pass the Means Test, which is set forth on Form 22 of the official Chapter 7 Petition. Many Debtors considering filing for bankruptcy are not entirely sure how to determine whether they qualify under the Means Test, as the steps that make up the test are somewhat confusing. The purpose of this article is to attempt to simplify the Means Test.
First, the Means Test takes an average of each Debtor's income in the six months prior to the month in which their petition is filed. A Debtor who has been unemployed at some point during the past six months will have a lower income for purposes of the Means Test than their current income, as the months during which a Debtor was unemployed (or employed at a lower income) may reduce the Debtor's income for the purposes of the test. In the Means Test, all income received by a Debtor, with the exception of Social Security benefits, is considered income. Regular income, rental income, investment gain, unemployment compensation, payments from a pension plan or a 401(k) account and retirement benefits are all considered income under the Means Test. If a Debtor is married and filing separately, all of the non-filing spouse's income is required to be included in the Means Test, though an adjustment is allowed for amounts paid by the non-filing spouse on a regular basis for certain qualified expenses.
Next, if the Debtor's gross monthly income is less than the median income for the individual's state and household size, then the presumption of abuse does not arise and the Debtor will qualify under the Means Test without going through further testing. The median state income per family in Georgia is $40,546.00 for a household of one, $55,061.00 for a household of two, $60,887.00 for a household of three, and $68,258.00 for a household of four. If the Debtor's annualized monthly income, as determined by the Means Test, exceeds the relevant median income for the Debtor's household size, then the remainder of the Means Test must be completed to determine whether a Debtor qualifies to file for Chapter 7 bankruptcy.
After gross income has been determined, a Debtor is entitled to deductions for certain IRS exemptions, depending on the state, county and number of individuals living in the Debtor's relevant household. These deductions are amounts that the bankruptcy court will allow all Debtors to deduct for various necessities, including food, clothing, shelter, heath care, transportation expenses, etc. This amount will vary from county to county, depending on the number of individuals residing in the household. For example, the collective amount of exemptions attributable to IRS standards for a Debtor living in Hall County, Georgia who owns his own home with a household of two people and two automobiles is approximately $2,014.00. For a Debtor living in Hall County, Georgia with three members in his household (and two automobiles), the exemptions total $2,264.00, and increase to $2,596.00 for a household containing four individuals. These totals do not include the automobile ownership expense, if there is a secured loan or lease on the vehicles, which results in a minimum additional deduction of $496.00 per automobile, less the amount of the deduction allowed for the corresponding payments to a secured creditor discussed below. Generally, the exemptions decrease somewhat for more rural counties and increase somewhat for metro counties.
The total of all IRS standards may be deducted from a Debtor's gross income in the Means Test. Once IRS standards have been deducted, a Debtor may further deduct from his or her income certain out-of-pocket expenses actually incurred, including, but not limited to, payroll deductions for state and federal withholding taxes, health insurance premiums, life insurance premiums, charitable contributions (not exceeding 15% of the Debtor's income), and certain educational and childcare expenses related to minor children, among others. Additionally, a Debtor may deduct payments for most of his or her secured debt, which includes the Debtor's payments to both a first and second mortgage holder, as well as taxes and insurance that are escrowed into a mortgage payment, and the payments on up to two automobiles used in the Debtor's household (so long as there is a sufficient amount of time remaining on the term of the loan). Also note that for those Debtors who do not own their own home, an additional IRS standard may be claimed for a rental expense, and the same will vary depending on the county in which the Debtor resides. Further, payment on priority claims (including child support and alimony required to be paid to a third-party), many involuntary deductions from income and other court-ordered payments may be deducted from a Debtor's income to determine whether they qualify under the Means Test.
The Debtor's gross monthly income, reduced by all available deductions allowed under the Means Test, equals the Debtor's Disposable Monthly Income (DMI). Basically, if a Debtor's DMI is less than $125.00 per month he or she will qualify under the Means Test. If the Debtor's DMI is in excess of $125.00, and the Debtor's DMI multiplied by 60 is less than 25% of the Debtor's unsecured, non-priority debts, then the Debtor passes the Means Test, so long as the disposable income does not exceed $195.00. If the Debtor's DMI exceeds $195.00, the Debtor will not pass the Means Test. In that instance, the Debtor may be a candidate for a Chapter 13 filing.
One issue should be noted: The fact that a Debtor passes the Means Test does not mean that he or she automatically qualifies for bankruptcy under Chapter 7. Instead, when a Debtor passes the Means Test there is no presumption that he or she is abusing the process by filing under Chapter 7 of the Bankruptcy Code. The U.S. Trustee (or any of the Debtor's creditors) may object to the discharge of a Debtor in bankruptcy, even though the Debtor has passed the Means Test, if the Trustee can convince the Bankruptcy Judge that the Debtor is attempting to abuse the process by filing. Similarly, a Debtor could have excessive income under the Means Test and could attempt to convince the Bankruptcy Court that he or she should receive a discharge under Chapter 7, though a showing of hardship would likely be required.
There are some common mistakes that are often made by Debtors attempting to determine whether they qualify under the Means Test. Other than the portion related to a Debtor's unsecured debt set forth above, a Debtor's monthly credit card payments are not relevant in determining whether he or she qualifies under the Means Test, nor is his or her exact expenses with respect to various services including electricity, water, gas, and a variety of other out-of-pocket expenses. Deductions from a Debtor's income directed into a 401(k) or other retirement account are not considered an expense under the Means Test. Typically, expenses paid by a Debtor for a child who is enrolled in college are not a deductible expense. Typically, an automobile ownership expense can only be claimed if the Debtor has a secured loan or lease on the vehicle.
Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.