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The Chapter 7 Means Test

Whether you quality for a Chapter 7 bankruptcy can be determined by taking the means test. If you pass the means test you are most likely able to file Chapter 7, if you don’t pass the means test, then you will be diverted into a Chapter 13 which means that you will have to repay on your debts for 5 years before you can obtain a fresh start.

The means test is used to determine how much money you should be able to re-pay on your debts. The test is very similar to the test which the IRS uses to determine how much per month you can afford to pay on your taxes.

The U.S. Trustee will first ask what your income has been in the last 180 days and then will double that income to determine your annualized income.

What if my income is above the State medium?

If you are above the State’s medium income, you still may be able to file a chapter 7 after completing the Long Form of the means test. The long form determines if you can rebut the presumption of abuse.

Examples of when the presumption of abuse would arise is in cases where your income is too high and/or if you have enough disposable income left over at the end of the month to repay your debts. If the presumption of abuse arises, there may still be special circumstances that would qualify you for a Chapter 7 discharge.

Example means test calculations

I give clients this simple example: Let’s say that within the first 180 days of filing your petition, you earned $20,000 and then the next 180 days you earn $10,000. How much according to the Means Test have you earned on an annualized basis?

Well, the answer depends on when you file your bankruptcy petition. If you filed your bankruptcy petition on July 1, then according to the Means Test, your annual income will be $40,000 but if you file your bankruptcy petition on Jan. 1, then your annualized income will be $20,000. (Note: you take the last 180 days and double the income for the means test purposes.)

So let’s review. If you file your bankruptcy petition on 7/1, your annualized income would have been $40,000 and if you filed on 1/1, your annualized income would been $20,000 and in reality, what you really grossed for the year was $30,000.

Most people receive a steady fixed income for the year and, therefore, this example wouldn’t apply to them but it would apply to a salesperson whose income can greatly fluctuate, or someone who works at a power plant and experiences spikes in overtime income.

Or a police officer, who works considerable overtime during one part of the year as opposed to another. Actually, it could apply to almost anyone.

Remember that the means test is not truly a ‘test of reality’ but rather an artificial test which has been ultimately developed by the IRS and borrowed by the Bankruptcy Code.

Dependencies

The rules as who is a dependent for the IRS purposes is constantly changing because the traditional view of the family is changing in our society. Presently, I am arguing that a person who is not a blood relative and has no traditional basis for being a dependent, will be claimed as a dependent for the means tests purposes and on their tax return when it is filed.

We have consulted with an experienced CPA on this issue. And when you look at the U.S. Trustee’s Chart, you will see how important dependents are in calculating your income for the means test.

If you are under the medium income for a family of your size in your state, then you don’t have to complete the long form of the Means Test.

Even if you are over the medium income for a family of your size, you can still pass the means test. You will have to complete the long form of the means test, but if you have expenses which can be used in your case, then it’s possible that you will still pass the means test.

Essentially, you need someone who is experienced in completing this form in order to determine whether or not the means test is a barrier to your fresh start.

I can state that I have had many clients who were above the state’s medium income and I still was able to put their Chapter 7 through the bankruptcy court without being diverted into a 5 year repayment in a Chapter 13.

  • you pass the means test if your income is below the state’s medium income level
  • after completing the long form, with 5 year’s of disposable income below $6000, there’s no presumption of abuse
  • the presumption of abuse arises with an annual income over $10,000 for 60 months (5 years)
  • without special circumstances you can’t file a Chapter 7 petition

1) If your annualized income is below your state’s medium income taking into account the number of people in your family, then you pass the ‘means test’.

However, like everything in the law there’s a however because the U.S. Trustee can still use a theory called the totality of circumstances which would hold that even if you passed the means test that under the totality of your circumstances, the U.S. Trustee could still object to your use of a Chapter 7 and try to convert you to a 5 year debt repayment plan in Chapter 13.

The Totality of the Circumstances is really a second bite at the apple because it uses the old standard as to whether or not the line item expenses in Schedule J of your bankruptcy are ordinary and necessary.

There are many websites which will inform you that once you pass the means test, it’s a slam dunk with your bankruptcy petition. I submit that it’s not that simple.

And yes, there have been excellent law review articles on the totality of the circumstances test, but it’s there like a huge shark quietly patrolling the shore.

2) Once you have completed the long-form of the means test, if your disposable income over a 5 year period is below $6,000, the presumption of abuse using the means test does not exist.

To arrive at the conclusion that your disposable income over a 5 year period is below $6,000 you have to complete a detailed document called, Official Form 22A, and you have to list every expense you have to live and justify that expense against the IRS standards for collection.

3) If you complete the long-form of the Means Test (Official Form 22A), and you discover that your disposable income is above $10,000 per year or ($166.66 per month for 60 months or 5 years), the presumption of abuse arises and can only be rebutted by showing special circumstances.

Therefore, you have to use a Chapter 13 bankruptcy petition which will mean that for 60 months you will be paying at least $166.66 per month on your credit card debt.

4) And finally, if your disposable income under the means test is between $6,000-$10,000 and when you multiple 25% times the total of your general non-priority unsecured debt and your monthly disposable income could pay 25% of your unsecured debt, then the presumption of abuse arises and you have to file a Chapter 13.

For example under the means test, if you had $90.00 per month in excess income and you had $15,000 in general unsecured debt, what would be the results? (Assuming general unsecured debt of $15,000 x .25= $3,750.00) Now take $90 x 60 months = $5,400 and $5,400 is greater than 25% of your unsecured debt.

Therefore, without special circumstances (no one really knows what this is yet), you can’t file a Chapter 7 petition.