The purpose of the means test is to steer higher income people to chapter 13. The idea is that, if you can afford to pay your debts in part, you should file chapter 13, not chapter 7. So if your income is “too high,” you might not be allowed a chapter 7 discharge. Under the law, if your income is above the state median income, you must pass the means test in order to file chapter 7. A brief explanation of the means tests follows.
Does the Means Test Apply?
The means test does not apply to most people filing bankruptcy. If your gross annual income is less than the median state income (see below) you are exempt from the means test.
|Household Size||Wisconsin Median Income|
|Each additional member||add $8,400|
How is Income Measured?
Your income, for means test purposes, is your income for the six months prior to the filing of your bankruptcy. Thus, if you file bankruptcy in September, we look at your income for March through August (i.e., the six months preceding the month in which you filed). Under the means test it doesn’t matter what your income is now. What matters is your income in the preceding six months. Of course the table above shows annual income, so your six month income multiplied by two when comparing it to the state median income.
What is Included in Income?
Income includes income from all sources. So income is more than what you earn at your job. For example, it includes unemployment compensation, the money your brother gave you to pay your rent, gambling winnings, retirement account distributions, a personal injury settlement, workers compensation, interest on your bank account, etc. Specifically excluded from income are social security payments and payments for being the victim of a crime.
What Happens if the Means Test Applies?
The means test starts with your monthly income (an average of the six preceding months as explained above). From your monthly income we subtract certain allowable living expenses. If that calculation shows you have less than $100 left over per month, you have passed the means test and thus may be eligible for a chapter 7 discharge. If you have more than $166.66 left over per month you have failed the means test. If you have between $100 and $166.66 left over per month, passing the means test depends on the amount of your debt. More specifically, if you have $100-$166.66 left over per month, and the amount left over is enough to pay 25% or more of your unsecured non-priority debts over five years, you have failed the means test.
What Living Expenses Are Allowable?
In determining your monthly living expenses, the Internal Revenue Service allowable living expenses are used (with certain adjustments), rather than the your actual living expenses. Living expenses are adjusted for your mortgage, car payment, child support, delinquent tax payments and other secured or priority debts. If the time remaining on your car loan (or other secured debt) is less than five years the payment is reduced based on a five year pay-off.
This website does not create an attorney-client relationship. The information on this website does not constitute legal advice. You are urged to obtain the advice of an experienced bankruptcy attorney regarding your personal situation.