Means Test

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 to file chapter 7. If your income is above the state median income for your household size, you must pass the means test in order to file chapter 7. 

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.

How is Income Measured?

Your income, for means test purposes, is your income for the six whole months preceding your bankruptcy filing. Thus, if you file bankruptcy in September, we look at your income for March through August (i.e., the six whole months preceding the month in which you file). 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 is doubled 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,  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 IRS living expenses & some actual expenses (like mortgage & car payments). If that calculation shows you have less than $100 left over per month, you have passed the means test and may be eligible for chapter 7. 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.  If you fail the means test, consider filing chapter 13.

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, payroll taxes 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.

What if My Income has Recently Changed?

Perhaps your income now is lower than what you were making in the six prior months.  Maybe you lost your job, retired or cutback at work.  If you fail the means test, but would have passed it using your actual income now (instead of what you made over the last six months), all is not lost.  You may still qualify for chapter 7 by filing a Rebuttal of Presumption of Abuse.  Call us at 414-445-2590 for more information.