What is the Means test?
The mean’s test is a complicated formula devised by the Bankruptcy Code to assess the debtor’s ability to pay their unsecured creditors and prevent abuse. It averages the debtors last six months of gross income prior to filing bankruptcy ending with the last day of the last calender month. It then annualizes the average month by multiplying it by twelve. If the annualized income is less than the annual median for the debtor’s state of residence and household size the Debtor’s ability to pay will not be presumed to be an abuse of the bankruptcy code. If the annualized income exceeds the annual median income, the Debtor’s ability is assessed by subtracting the standards or means. The standards or means are the living, housing, transportation and other necessary expenses determined by the bankruptcy code. If after subtracting these expenses Debtors demonstrate an ability to pay unsecured creditors at least $166.67 per month or if less than $166.67, but greater than $100.00 per month at le
The “Mean’s Test” is a formula that determines whether the person filing for bankruptcy protection has enough income to pay the expenses that are allowed, plus extra money to pay to non-priority, unsecured creditors such as credit cards. The Debtor must calculate their “current monthly income”, including all income from spouses, rents (minus expenses), bonuses, plus “help” Debtor has been receiving from family or friends. Allowed living expenses and payment of secured and priority debts are subtracted from the total income for a net income or monthly disposable income that could be used to pay unsecured non-priority debts. The chapter 7 can be challenged if the net income, multiplied by 60, is greater than (1) either 25% of the nonpriority unsecured claims or $6,000, or (2) greater than $10,000. The Debtor may be required to convert the case to a chapter 13 or lose the bankruptcy protection completely.
The means test is used in cases where the Chapter 7 individual debtor’s(s’) current monthly income exceeds the state’s median family income. It is used to determine if a debtor has the ability to repay a minimum level of general unsecured debt after the payment of allowable monthly expenses. If the means test shows a debtor has such an ability to repay, there is a “presumption of abuse.” In other words, if the debtor(s) receive(s) a Chapter 7 discharge, this would be an abuse of the bankruptcy process, because the debtor(s) may have the ability to repay debts outside of bankruptcy or through a Chapter 13 repayment plan over time. The analysis involves application of certain IRS guidelines for expenses in determining the ability to repay as well as a review of income from the previous six months to determine if the debtor(s) is/are above the median income for the state where they reside. All of this is explained in the step-by-step procedures in this site. The links to the IRS guideline
