Means Test
The Means test is required for all individual bankruptcy filers. This is a complicated test to determine whether there is a presumption for abuse or not. The Chapter 7 filer actually wants to "fail" the test to show that there is no presumption of abuse to allow filing. However, even if you "fail" the means test, your case can still be dismissed under the "totality of circumstances" test, the trustee feels that your case is an abuse. The means test takes your income for the past 6 months, averages that income, and then multiplies that average monthly income by 12 to get a yearly income. This income is then compared to the median income for your family size in your state. If your income is below the median, you can file Chapter 7. If above, you may still be able to file Chapter 7, but you have to complete the rest of the complicated test to determine if your expenses qualify you to overcome the presumption of abuse. If you are unable to overcome the presumption of abuse, you may be limited to filing under Chapter 13.
The means test has different purposes under Chapter 7 and 13. In Chapter 7, the means test is a snapshot of the financial condition on the day filing bankruptcy. In Chapter 13, the test measures the amount of money which will have to pay creditors over the 3-5 year period.
Income under the means test includes not only income from work, but other income including interest, dividends, pension income, bonus payments, child support, alimony, maintenance payments, and disability payments under workers compensation or private insurance. Income may or may not include withdrawals from IRA and 401K plans and income tax refunds. Income does not include social security payments and unemployment benefits. Income can also include employer reimbursements for items such as mileage (but reimbursements can also be listed as an expense netting zero overall income- list under income from the operation of a business, profession, or farm under Gross receipts and the expenses under Oridinary business expenses. The reimbursements must also be included under Schedules I and the expenses under Schedule J.
To overcome the presumption of abuse in the first part of the Means Test, the debtor will need to have enough expenses leaving him/her with insufficient disposable income to fund a plan under Chapter 13. These allowances include:
Size of the family
Additional allowance if family member over 65
Housing (non mortgage) and utility expenses per IRS manual
Average monthly mortgage (includes cure fees to catch up on the mortgage- even if not keeping the house under Chapter 7! Cure fees include late fees, appraisals, drive by inspections, forced place insurance, attorneys fees, title charges, service charges for foreclosure if commenced-- the total owed to the mortgage company)
Vehicle operation expense
Public transportation expenses if utilized
Vehicle ownership costs which vary from court to court
Under part C of the Means Test, payments for secured and priority debts are calculated. Secured claims are claims "secured" by property such as your car loan. Priority loans are defined under Chapter 507. These include priority taxes, child support, and alimony among other claims. Loans (even if the debtor owes less than 60 months of payments) are calculated on a 60 month payment schedule.
These allowances and expenses are then deducted from the debtor's current monthly income, multiply the answer by 60 (the applicable commitment period) and if the result is more than $10,950 (which is adjusted for inflation periodically) then there is a presumption of abuse if a Chapter 7 case is filed. If the result is less than $6575, then there is no presumption of abuse. If between the two figures, then the debtor needs to pass a secondary presumption.
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