In the bankruptcy alphabet, no letter is more important than M. The means test is a brutal and unforgiving function of the U.S. Bankruptcy Code, and it applies in every consumer bankruptcy case. That means you need to understand it before you sit down to speak with a lawyer.
According to the U.S. Bankruptcy Code, means testing “refers generally to the eligibility for relief for debtors who have sufficient financial means to pay a portion of their debts.” In other words, it’s a way to determine your eligibility to file for Chapter 7 or Chapter 13 bankruptcy.
How The Means Test In Bankruptcy Works
The first step is to determine your household size. Once we do that, we look to the median income for a household of your size. In New York, the median incomes as of November 2011 are:
1 Person: $45,931
2 People: $56,113
3 People: $66,953
4 People: $81,212
If your annualized median income falls below the state median, you’re all set – no need to dive deeper, as you are presumed to qualify for Chapter 7 bankruptcy.
If Your Income Is Above Median
If your income is above the median income, we need to look at the expenses permitted under a variety of classifications. Those expenses vary based upon where you live and the size of your household, as well as whether you’ve got any secured and priority debts to pay off.
We deduct those allowed expenses from your income over the six months immediately prior to the bankruptcy filing to see if there’s anything left over. If not, you’re home free and can file a Chapter 7.
If There’s Money Left On The Table
If you go through the means test and there’s $182.50 or more left over on a monthly basis then you’re going to need to go into Chapter 13 due to a presumption of abuse. You can try to rebut the presumption, but that depends on your individual facts and circumstances.
The Vigilant Bankruptcy Lawyer And The Means Test
One place where some lawyers fall down is by not dissecting every possible opportunity for expense deductions on the means test. Pass over just a few minor applicable expenses and you could be forced into a Chapter 13. But if you’ve got a vigilant bankruptcy lawyer who understands how to apply the law then you may be able to fit into a Chapter 7.
When The Means Test Doesn’t Apply
The means test does not apply in all bankruptcy cases. For example, if your debt is primary consumer debt (in other words, 50% + $0.01 of your total debt is considered to be non-consumer debt) then you don’t need to complete it.
In addition, the National Guard and Reservists Relief Debt Act of 2008 says that members of the National Guard Member or Armed Forces Reserve are excluded from the means test for entire time you are on active duty and 540 days thereafter, provided you serve at least 90 days.
6 Reasons The Means Test Is Unfair
There are a few things that are unfair about the means test. In no particular order, they are as follows:
- “Income” for bankruptcy purposes is not necessarily a reflection of what you make, nor is it a reflection of what you are currently making
- “Household” as defined for the means test in bankruptcy does not easily square with the way that most people define the term in their own heads
- Deductions permitted under the means test don’t line up with your real expenses, and may in many cases be lower than what you actually spend per month on the basic necessities of your life
- The amount of money you’re required to pay into a Chapter 13 bankruptcy Plan due to the numbers spit out at the end of the means test may not actually be available in your budget
- Due to the fact that it is so difficult to understand, many people who file for bankruptcy with inexperienced bankruptcy lawyers are penalized. In that sense, the means test seems to reward people who pick better bankruptcy lawyers rather than those who have a better ability to pay back a portion of their debts
- The means test seems to discourage saving for retirement and the inevitable medical crisis
In the end, you’ll read a ton about bankruptcy lawyers decrying the means test. It makes no sense, doesn’t reflect reality, and makes the process more expensive for you because your attorney needs to do more work to get your bankruptcy papers drafted. All good points.
Unfortunately, all of those points and a MetroCard will get you on the subway.