How Does the Chapter 7 Bankruptcy Means Test Work?
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 the chapter 7 bankruptcy means test 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, 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
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 (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.
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. What that means is that, under the bankruptcy law, it appears that you make enough money to pay off your debts, and so you filing a bankruptcy case is almost in bad faith.
What If I Make 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), the Means Test has several layers to try to get you to qualify. If you 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.
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 the amounts you paid for tax withholding. This amount would likely get you to easily pass the Means Test. So, if you initially do not pass the Means Test, be sure to deduct the allowances that you can take.
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 to discuss 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]