The Means Test in Bankruptcy

The Means Test was enacted by Congress as part of the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA).  The Means Test affect both chapter 7 and chapter 13 bankruptcies and is an important component of these bankruptcies.

What is the Means Test?

The Means Test essentially looks at the median income for your household size in the state that you reside to determine if you qualify for a chapter 7 and is also used to determine the length of your chapter 13 plan.  The idea behind the Means Test is that people who make over the median income should be able to repay a portion of their debts and should not be able to file for a chapter 7 or have a short chapter 13 payment plan. The Means Test looks at your income earned 6 months before your bankruptcy case is filed and if that number is higher than the median income, a presumption of abuse of the bankruptcy system arises.  However, this is not the of the inquiry. The presumption of abuse can be rebutted in certain circumstances, and you may be able to satisfy the Means Test by taking certain allowed deductions so you can qualify for a chapter 7 or have a shorter chapter 13 plan. Steiner Law Group has helped many clients navigate the complexities of the Means Test.

Income Calculations

There are many circumstances in which it is difficult to calculate your income, and as described, this calculation is very important for the Means Test.  If you do not have steady income (such as a Lyft or Uber driver), or if you are self-employed, it may be difficult to calculate your income. Steiner Law Group is experienced in accurately calculating income even in confusing circumstances.

Examples of deductions you can take to meet the Means Test.

Although you may earn more than the median income for your household in the state that you reside and therefore seem to not meet the Means Test, you still may qualify for a chapter 7 bankruptcy.  Here are some examples of additional circumstances that the Means Test allows you to deduct:

1. Tuition and other expenses for your child’s education if she has to go to a special school because she is physically or mentally challenged;
2. Out-of-pocket-health care expenses;
3. Telecommunications services, like pagers, call waiting, caller id, special long distance or internet service to the extent necessary for your health and welfare or that of your dependents;
4. Reasonable and necessary expenses associated with the care of elderly, chronically ill or disabled family members;
5. Monthly expenses incurred to maintain the safety of your family under federal laws, like the Family Violence Prevention and Services Act;
6. Excessive home energy costs.

These additional deductions may qualify you for the Mean Test.

What if I don’t pass the Means Test?

If you do not pass the Means Test, a presumption of abuse of the bankruptcy system arises, and the United States Trustee’s office takes a closer look at your case to see why it should not be dismissed or converted to a chapter 13.  However, this is only a presumption that can be overcome in certain circumstances, such as:

1. Serious medical conditions;
2. Being called to active military duty;
3. Recent job loss, income reduction, layoff or forced retirement;
4. Expenses for a non-filing spouse, such as credit obligations;
5. Recent marital separation or divorce.

Because the Means Test looks at your income in the past 6 months, if you file your case shortly after you lose a job, for example, the presumption of abuse can be overcome.  Similarly, if you have recently developed a serious medical condition, you may be able to overcome the presumption of abuse. Steiner Law Group is experienced with helping clients that have experienced unanticipated life events to navigate the Means Test.

Waiting to File.

Another way to pass the means test is to wait a few months so that the 6 months look back period does not reflect the higher income.  This may a good option for someone who is not facing garnishments or a foreclosure and can therefore wait a few months before their case is filed.

The Means Test in Chapter 13

Although there is no requirement to meet the Means Test to file under chapter 13, the Means Test comes into play when calculating how long your payment plan will last.  If you earn below the median income, you may be able to have a 3-year plan, which could mean that you pay back less than a 5-year plan. If you have to pay back arrears on a mortgage, you may wish to extend your plan longer than 3 years even if you qualify for a 3-year plan.

Steiner Law Group has helped many clients navigate the Means Test, which can be one of the most confusing aspects of a bankruptcy.