Means Test and Bankruptcy
Are you in debt and looking to file Bankruptcy? Well, first you must pass the test…the means test that is.
In 2005, the United States Bankruptcy court made several changes to the law, the most noteworthy for this blog being the addition of a means test that is used to prevent wealthy debtors from filing a Chapter 7 Bankruptcy. This test was put into effect as a means to prevent abuse by those who could actually afford to pay off a portion of their debt in a Chapter 13 Bankruptcy. Below, we will explain what this important change means for you.
What is the means test?
The means test is simply a test that attorneys use to determine if a potential debtor is eligible for a Chapter 7 Bankruptcy—a straight Bankruptcy. To learn more about a Chapter 7, see our previous blog:
The means test is intended to calculate the debtor’s disposable income. Your attorney will start by calculating gross monthly income based on the last 6 months from your pay stubs or from any other source of income your household has earned. The test then proceeds to subtract the debtor’s expenses to determine debtor’s disposable income. Some of the expenses are fixed allowances allowed by the IRS while some expenses are “actual” expenses paid by the particular debtor.
The result of this test will help determine whether the debtor is a candidate for a Chapter 7 bankruptcy or if he should be in a Chapter 13. If the debtor’s monthly income is substantially higher than his monthly expenses, chances are he will have to be in a Chapter 13 so that he can pay back a percentage of his debts back in the Chapter 13 plan.
What information is used in the Means Test?
The most important piece of information used in the means test is the debtor’s CMI. This stands for Current Monthly Income but is actually more of an average of the last six months. Employment, business income, rental income, unemployment benefits, social security benefits, retirement and pension benefits—all these are included when calculating the CMI. Social Security benefits are listed on the test but they do not count towards your CMI. This CMI amount is then compared to the state’s median income for the number of people in your household. If you are at or below this median, then you qualify for a Chapter 7.
What if I am above?
If you are above the median for a Chapter 7, then there is still a chance that you may still be able to file under this Chapter. Those households with a large amount of expenses may be able to even out the excess. In these cases, your attorney can enter extra expenses such as taxes, automobile payments, out of pocket health care expenses, etc. to determine if you can still qualify for a Chapter 7. Please speak with your attorney about your options if you think you fall above the median income for your state.
I passed the Means Test but I still don’t qualify. Why?
There are a small percentage of people that can pass the means test but still do not qualify for a Chapter 7.
This is due to the omission of Social Security retirement income as part of your CMI. Any income or payments under the Social Security Act (SS retirement, disability, and SSI) is not included as income in the means test.
Let’s say that your household of 4 has income from Social Security retirement, pension, and one spouse’s employment income. Your attorney will have to list every single source of income from above, however your SSI income does not get calculated into your total CMI. In this example, let’s just say your pension and spouse’s income add up to a total of $60,000.00 gross per year. Since the median income for a household of 4 in SC is $60,143.00, your means test shows that you qualify to file for a Chapter 7 right?
Not so fast!
The infamous schedule I (which stands for Income) does take into consideration any income from the Social Security Act as actual income. At this point, you should be asking yourself, “Huh? What’s the point of the means test then?” Trust me, attorneys are still asking the same exact question.
Let’s say that in the example above your Social Security retirement income is $1,043.00/month. If you do not have enough expenses in your household to eat up this $1,043.00 extra income that wasn’t there before, you find yourself with a disposable income in excess of where it needs to be. Hence, be prepared to file a Chapter 13 and pay back a percentage of your debt with his disposable income.
If you find yourself in this predicament, speak with your attorney regarding your options. Your attorney may be able to help you to reconcile the excess income by balancing the amount with your household expenses.
Lam Law Firm, LLC •1335 44th Ave North • Suite 100 • Myrtle Beach, SC 29577
DISCLAIMER: The information contained on this page is for general information, only. It is not intended to be legal advice, nor should you make legal decisions based on this information. Please consult one of our attorneys to see how the law applies to your particular situation.