What is the Means test?
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. The links to the IRS guidelines and median income information are found on the United States Trustee
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. §707(b). Basically, if the debtor can pay $100 per month to their unsecured creditor
The means test was explained in the Chapter 7 FAQ. In a chapter 13 it is complicated because of a change in the definition of “disposable Income”. 1325(b)(2) The form used is Official form B22C. The problem is that the disposable income test, under either 7 or 13 median income approach, will not be an accurate measure of future ability to pay in the Plan. The test is a look back, not forward in time. In addition to other deductions, charitable contributions, up to 15% of gross income, is included 1325(b)(2)(A)(ii).
The means test is a new provision of the bankruptcy code. Basically, it is used to make sure you are a good candidate to file bankruptcy. It is also used to help calculate what portion of the debts you have to pay back under Chapter 13. Currently, the means test looks at a debtor’s household income received over the six months leading up to the case. It compares the debtor’s average income to the local IRS median income. If the income is below the threshold, the debtor is not subject to the means test and the filing is presumed to be made in good faith. If the debtor’s income is above the median income level, the means test analyzes the debtor’s monthly expenses compared to the IRS standards. Then, If the debtor ‘passes’ the means test, the debtor can proceed with a chapter 7 filing. If the debtor ‘fails’ the means test, it just means that a chapter 7 filing is presumed to be in bad faith. There are exceptions, and the court can hear any exigent circumstances that would suggest a debto
Under the new bankruptcy laws that went into effect in October 2005, all Chapter 13 debtors are required to file a Means Test Calculation along with their Bankruptcy Petition, Schedules and Statements, and other required documents. Generally, a means test is performed by looking at all of the debtors income for the 6 months preceding the date of filing, determining the average monthly income, and multiplying that figure by twelve. The resulting figure is then compared to the median income in the state of Florida for a household of similar size. If the debtor is over the median income, then further tests are conducted to determine how much, if any, disposable income the debtor has at the end of month. Often the disposable income must be dedicated over the life of the Bankruptcy plan to paying unsecured creditors. This analysis is completed by your attorney.
