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How To File Bankruptcy: Means Testing Deductions From Income

How To File Bankruptcy: Means Testing Deductions From Income

By |May 28th, 2013|

This is part of our series on How To File Bankruptcy.

how to file bankruptcyEven if your income is above the applicable median family income, you may still qualify for Chapter 7 bankruptcy.

You’ve done the means test.

You’ve calculated your current monthly income.

And you’ve checked it against your applicable median family income.

Things are looking bad for you, Chapter 7-wise. But wait – all hope is not lost.

Using Deductions In Means Testing

The bankruptcy system recognizes that you bring your entire gross income home with you in your pocket, and that life itself costs money.

To give a more realistic sense of how much that life should cost, the second part of the means test provides you with certain deductions for standard expenses.

These deductions from income are (supposedly) figured out by looking at the cost of living in your area as well as the size of your household.

The larger your household size, the bigger your allowed deductions. It makes sense, after all – the bigger the family, the more you’re going to spend each month on things like food and clothing.

Examples Of Means Testing Deductions

Here is a partial list of some of the allowed deductions from income on your means test:

  • food and clothing – based on national standards;
  • utilities – based on local standards;
  • mortgage payments (or, if you’re a renter, rent expenses) – based on local standards;
  • vehicle ownership and operation costs – based on local standards;
  • federal, state and local taxes;
  • life insurance;
  • court-ordered payments;
  • involuntary deductions from employment for retirement contributions, union dues, and uniform costs;
  • child care;
  • education for employment or for a physically or mentally challenged child;
  • telecommunications;
  • Health Insurance, Disability Insurance, and Health Savings Account Expenses;
  • Continued contributions to the care of household or family members;
  • Protection against family violence;
  • Home energy costs in excess of the amounts provided for under local standards for utilities;
  • total average monthly expenses that you actually incur, not to exceed $156.25 per child, for attendance at a private or public elementary or secondary school by dependent children less than 18 years of age;
  • Continuing charitable contributions; and
  • total average monthly amount by which your food and clothing expenses exceed the combined allowances for food and clothing (apparel and services) in the IRS National Standards, not to exceed 5% of those combined allowances.

As you can tell, it’s a fairly lengthy list of deductions. When you complete your means test forms, it’s important to review each of these potential deductions to see how you can maximize them.

Why Your Deductions From Income Are Important

If your currently monthly income is above the applicable median family income, you will be be unable to file for Chapter 7 bankruptcy.

If you try to file for Chapter 7 bankruptcy, you’ll be subject to a presumption of abuse – and fighting to keep your case alive is going to be time consuming and frustrating.  There’s a good chance you’ll fail.

Utilizing the deductions from income may save you, helping to rebut the presumption of abuse and giving you the opportunity to get relief under Chapter 7.

More to the point, these deductions help to paint a more accurate picture of your financial situation. They complete the scene, providing a greater sense of where the money goes each month.

In the end, that’s the most important piece of the puzzle.

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About the Author:

I've been a consumer protection lawyer since 1995, working to help people end their bill problems. I'm a faculty member at the Student Loan Law Workshop, a nationally recognized speaker, and a long-time member of both the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.