Means Testing in Bankruptcy: How Does Chapter 7 Bankruptcy Means Testing Work?

Means Testing in Bankruptcy: How Does Chapter 7 Bankruptcy Means Testing Work?

Calculator for Means Testing

If you’re struggling with paying your debts, filing for bankrupcy may be one of the best things you can do. That being said, not everyone qualifies to file for bankruptcy. Since the Means Test is a big part of determining whether someone can file for bankruptcy, how does chapter 7 bankruptcy means testing work?

Bankruptcy cases strike a delicate balance between giving a debtor the opportunity to obtain a financial fresh start and ensuring that creditors are allowed to enforce their rights under a contract. As a result, the bankruptcy laws have limits on who can file a bankruptcy case.

The Chapter 7 Bankruptcy Means Test

One of the most important analyses in a chapter 7 bankruptcy is the Means Test. The Current Monthly Income/Means Test is a mathematical test that was included in the bankruptcy laws to serve as a threshold for ‘presumptively abusive’ filings. That is, if your income that is calculated under the means test is above a certain level for your household size, then your case is presumptively abusive.

Since bankruptcy protection is intended to protect people with little to no means of paying off their debts, the law has decided that if you have more than that level of income, you should not be able to obtain bankruptcy protection.

How The Means Test Works: All About Monthly Income

Now that you understand that the Means Test is a filter in bankruptcy cases, we can turn to how it actually operates. The Means Test is a measure of your average household monthly income for the last 6 months compared to the median income for a household of the same size as yours.

So, for example, if you’re a single individual living in New York. The median income for a household of one (as per the federal government at the time of this article) is $59,956. Under the Means Test, the person would calculate the average monthly income the household received from all sources over the last 6 months, and measure that current income level against the median annual incomes for their household in their state.

Once you determine what the average monthly income is, you then multiply that figure by 12 to get the annualized income. This annualized income figure gets compared to the median income figure. If your monthly income is less than the median income, then you ‘pass the means test’ and your bankruptcy case is not presumptively abusive. If your monthly income is greater than the median income, then you have to do some further math to see if your income can be reduced to less than the median income.

If, after going through all the calculations your monthly income cannot pass the means test, it means that your case is presumptively abusive. This means that, under the bankruptcy law, it appears that you make enough money to pay off your debts, and so filing a bankruptcy case is almost in bad faith.

Bankruptcy Means Test Forms

Bankruptcy Means Testing is actually completed on a series of forms.  The first form is used to determine current monthly income.  The second form is used only if you need it (if your annualized income is greater than the median income for a household of your size.

What Are The Money Limits For the Means Test?

As a NYC bankruptcy attorney, I get a lot of questions about means testing. People want to know how much money they can make and still be able to file for bankruptcy, get their unsecured debts discharged, and keep their property. 

The numbers for the means test median income levels is published by the Office of the Trustee of the United States Department of Justice.  The household income figures are compiled from a few federal programs – the Census Bureau and IRS data.  

As national standards wouldn’t be fair (since cost of living varies dramatically around the country) the data collected by these government programs are parsed out to come up with income thresholds based on your location and family size to determine access to programs.  The income limits are adjusted every couple of years to try to accurately reflect household income over time.

You can check out the means test numbers published by the USDOJ by clicking here.

Do Social Security Entitlement Benefits Count Towards Bankruptcy Means Testing?

The traditional means test in bankruptcy requires a filer to pass a means test. (Put simply, the Bankruptcy Code is designed to prevent rich people from being able to discharge their debt by filing bankruptcy).

The means test is a formula that will determine whether the filer is eligible for Chapter 7 bankruptcy. Chapter 7 bankruptcy is a bankruptcy that discharges most debts and allows the filer to keep assets such as the family home, any car or a modest amount of personal property.

If a person’s income is too high, then the filer may not be eligible for Chapter 7 bankruptcy. A person’s income is generally the amount earned before taxes.

If you are considering filing for Chapter 7 (or 13) bankruptcy, the court will look at how much money you make to determine what you can afford to pay back.

However, if you receive means-tested government benefits like Social Security, you may qualify for an exemption to the “means test” that determines how much you would be able to afford to pay back.  Many people are surprised to learn that Social Security benefits do not count towards the means test in bankruptcy. 

What If A Person Makes More Than The Median Income?

What if you are a single individual making $65,000 in New York? Since the median income is $59,956, does that mean you are categorically unable to file to bankruptcy? The answer NO – you still may be able to file for bankruptcy.

Although initially you may not pass the Means Test (since your annual income is greater than the applicable median income), this will trigger an initial presumption of abuse.  That’s not the end, however, since the Means Test has several layers to try to get you to qualify.

If bankruptcy filers initially do not pass the Means Test, in the next section, you can start to reduce your annual income by deducting allowances. These allowances, which represent that average cost for regular expenses, may help to reduce your income enough to pass the Means Test.  The allowances go deeper into your specific actual expenses, including special family circumstances, health care costs, as well as the ability to consider consumer debt that would be paid in a chapter 13 case.  Sometimes, these actual expenses will really help get someone with above-median income to pass the means test because you get to paint a very clear picture of your financial situation.

Getting back to the example, if you are a single person making $65,000 in New York, the applicable median income is $59,956. Initially, you would not pass the Means Test. But in the second level of the Means Test, you can deduct certain household expenses you paid, such as tax withholding (or income taxes for business), some charitable contributions, certain health insurance costs, unique energy costs, and some mandatory retirement contributions, just to name a few. Often, after factoring in these kinds of monthly payments, would likely allow you to sufficiently reduce your average income for bankruptcy purposes, and get you to pass the Means Test. So, if you initially do not pass the Means Test, be sure to deduct the allowances that you can take.

What If There Are Multiple Disposable Incomes In My Household?

The number of disposable incomes in a household has a very large impact on the financial stability of that house. If the disposable incomes in a household are increasing, then the household will be overall more financially stable than if the disposable incomes were decreasing. Discretionary income is household income that is left over at the end of the month after you have paid all your necessary expenses.

The way the courts look at multiple disposable incomes here in NYC are to think about heads on beds, and who is responsible for whom, to determine the appropriate median family income.  A married couple with 2 minor children is a household of 4, for which the disposable income of both spouses will be considered for means testing.

On the other hand, a single adult filer living with 2 roommates is a household of 1.  Although there are 3 adults living in the space, the filer is only responsible for him/herself, and so no one else’s income comes into the equation.

Conclusion

The Chapter 7 Bankruptcy Means Test is designed to act as a safeguard, and keep people that have sufficient funds to pay their debts out of bankruptcy. The Means Test works by comparing your average monthly income for the last 6 months against the annualized median income for a household of your size where you live. If you don’t initially pass the Means Test, be sure to go through the second level of analysis and deduct any allowances that you can. Often, this is how you can get a case that initially didn’t qualify for bankruptcy to eventually qualify for chapter 7 bankruptcy.

If you would like legal assistance in filing your chapter 7 bankruptcy case, then contact the Law Office of Richard Kistnen by emailing [email protected], or calling (718) 738-2324.

Law Office of Richard Kistnen

128-22 Rockaway Boulevard

South Ozone Park, NY 11420

Tel.: (718) 738-2324

Email: [email protected]

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