The Means Test in Bankruptcy
The means testing bankruptcy is a test used whether you file Chapter 7 or Chapter 13 bankruptcy to determine your eligibility to file chapter 7. A presumption of abuse or non-abuse is created based on the results of your test and that test is determined is used to determine whether you are eligible to file Chapter 7 bankruptcy.
The Chapter 7 and Chapter 13 means test is used differently to determine what monthly amount you can contribute to unsecured creditors. It is also used to determine whether you are in a 36 month or 60 month commitment for your Chapter 13 bankruptcy.
The means test considers your gross income as well as any income that’s used to contribute to you. For instance, if you’re married then your spouses income must be counted on the means test. The means test considers the last 6 months prior to filing bankruptcy, so after taking your gross income, the means test compares that figure to the median income figure for the number of members in the debtor’s household size. If the debtor is below the median income, that is the end of the means test. In a chapter 7 context, that will mean that the debtor is eligible to file chapter 7. In a chapter 13 context, it will mean that the debtor can commit to just 36 months or 3 years.
For the debtors chapter 13 bankruptcy, if the debtor is above median income, then the 2nd prong of the main means test is utilized. In a chapter 7, the second prong is utilized to see if the debtor has any disposable income.
What the means test does is from your gross income, it subtracts anything that would be considered by Congress more important than paying your unsecured creditors. That includes your mortgage payment ,your car payment ,your health insurance, your medical bills, your life insurance, your charitable contributions, your contributions to sick or elderly relatives, your income taxes, your child support, your court-ordered payments. All of those are considered more important causes than paying your unsecured creditors.
If at the end of all that, you still have on a monthly basis money left over more than a nominal amount of basically around 180 bucks a month or more, there is a presumption of abuse for you to file chapter 7, and you should therefore be in a chapter 13 bankruptcy.
If you wish to file it is a rebuttable presumption, but it is a presumption nonetheless, student loan payments and 401(k) loan contributions are not considered deductions on the means test. Student loans are not on either chapter, while 401(k) loans as well as loan repayments are considered in a chapter 13 means test, but not in a Chapter 7 means test.
There is an exception to taking the means test that is if you are majority non-consumer debtor i.e. a business debtor. If you are a non-consumer/business debtor, then you do not have to take the means test. It is based on simply adding up the total amount of your debt in determining whether the majority of it is from business. If it is, then you have an exception to the means test and you do not have to take it. Other than that ,every debtor will be taking the means test.