The Mysterious Means Test

The Mysterious Means Test

I cannot think of anything that my clients are more nervous about when they are thinking about filing for bankruptcy then whether or not they will pass the “means test”.   By now most have heard about the bankruptcy means test.  With that knowledge is knowing there is at least a chance that they may be forced to file a Chapter 13 if they don’t pass the means test.  Some even worry that the means test will prevent them from filing for bankruptcy at all. Although these fears are generally unrealized, the reason for the confusion is certainly understandable. The means test is somewhat complicated, but not more than any other government form.  This is what you need to know about the means test and how it could affect you. 

History Behind the Means Test

The Chapter 7 means test was originally enacted to stop bankruptcy abuse.  This was probably what most consider the biggest change to bankruptcy law.  The amendments were enacted in 2005 and also known as “The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005″ or “BAPCA”.  The theory was that if people could afford to pay at least part of their debt they should not receive a total discharge. The problem is that the income caps are set without taking into account the debtor(s) actual ability to pay their debt. In those case the debtor(s) end up in an unmanageable 60 month plan.  In practice most of those plans only pay back pennies on the dollar to unsecured creditors anyway.

There is no question that some debtors really should be in a Chapter 13 plan because they can afford to pay some of their debt back.  It also helps folks who are behind on car (you can put the entire loan into you bankruptcy) or mortgage loans that are in foreclosure and they want to keep the property.  But for many others the mean test is just an unavoidable nuisance.  You should understand how the means test works so that you are certain the advice you receive from any lawyer is sound.

The Means Test – It’s All About the Numbers

In short, the way the means test works is you have to begin by taking the average gross income over the previous 6 months.  (That includes both spouses incomes if filing jointly). Because CMI (current monthly income) is an average, the resulting number may be more or less than your actual current income.  So for example,  an unemployed debtor may still have a relatively high CMI if the unemployment was very recent.  Likewise, if you received little income for several of these months but now have a steady salary, your CMI may be lower than your current income. For that reason your attorney may offer the following advice:  If your income is going down wait to file, but if your income may be going up you should file as soon as possible.

If that number is higher than the means test number for your state and family size, the second thing is to take some itemized deductions. This is kind of like filing a 1040, but some of the deductions you are allowed are fixed so if you spend more for something like rent or a car payment too bad you only get the government allowed amount as a deduction.  This is exactly where the means test can be a problem for many who for example pay a $600.00 car payment but they can only deduct $400.00.  (I am making these numbers up so don’t rely on them).   If you get the gist of this, now in a Chapter 13 it is assumed that you should have $200.00 laying around with which to pay your creditors when in fact you do not pay $400.00 you actually pay $600.00.  There are many more examples of this on the means test.

Seniors Get Some Breaks As It Should BE

** Note:  Senior citizens with SSI and individuals on SS Disability should be aware that Social Security income does not count towards your CMI and should not be include in your calculations, however, it does count toward your budget and excess income analysis.

If you want to play around with the means test it is on the US Bankruptcy website, but to be honest you should seek counsel before relying on your own analysis of the means test because it is not exactly as it seems.  There are some ways to take deductions through schedule D that you would not be able to ascertain just from plugging number in to the example means test.  Curious try it here. 

Call us and we will run the numbers for your to see which Chapter you should file.  All we need is your last 6 months of pay advices (stubs).  Call now 801-558-2266 or email me at