The Bankruptcy “Means Test” is a form that must be completed by most individuals filing for Bankruptcy.  The Test is used in determining whether an individual or couple qualify for a Chapter 7 case or whether they have sufficient disposable income (or “means”) to pay something to creditors in a Chapter 13 plan.  Importantly, the Means Test uses total household income, even if only one spouse is filing a Bankruptcy case and the income figure used is based on the total income for the six month period prior to the filing date.

There are two main stages to the Means Test.  In the first stage, total household income for the prior six months is compared to the median income in the appropriate state, based on the number of people in the household.  Median income refers to figures taken from the IRS, and the numbers are revised (up or down) periodically. Current figures for all states can be found on the United States Trustee website.

For example, if an individual or couple with two young children were filing a Bankruptcy case in Georgia, and their total combined income for the last six months is $32,348,  the annualized income would be double that, or $64,696.  The current median income in Georgia for a family of four is $68,085, so the couple (or each of them, individually) qualify for a Chapter 7 case if they choose to do so.

If we change the numbers so that the couple in the example have an annualized household income of $10,000 more, or $74,696, they are above the median for Georgia and do not automatically qualify for Chapter 7 in stage one.  They then move to the second stage of the test.   This stage is a much more thorough test that involves using the couple’s actual household expenses instead of average or median figures.  Lets go back to our example, where the couple has “failed” the first stage of the Means Test.  The Georgia median income for a family of four ($64,696) presumes an average monthly house payment (or rent) of around $1,000.  If our couple has an actual monthly house payment of $2,000 (certainly not an extravagant number), they are paying $12,000 a year more than the “median” household.  They are allowed to use this figure in the Means Test and this (in a very simplistic example) essentially adds $12,000 to the threshold income figure for qualifying for Chapter 7 ($64,696 + $12,000 = $76,696).  Since their income of $74,696 is less than the new limit of $76,696, they likely qualify for Chapter 7 based on their actual expenses, assuming all other expenses are equal or more than the median.

As stated, this is a very simplistic, fictional example of how using actual expenses in the second stage of the Means Test can allow a person to qualify for Chapter 7.  When you meet with your lawyer, she will review all of your monthly expenses, including housing, vehicles and transportation expenses, insurance, utilities, and unusual medical expenses.  Each of these numbers will be plugged in the software, and it is possible that another expense may be lower than the median (the most common example is when a debtor owns a vehicle free and clear and has no monthly payment).   Bankruptcy lawyers have both the expertise and powerful software to determine whether or not you “pass’ the Means Test. In many cases, the calculations come down to a few dollars difference one way or the other, and that means the difference between a Chapter 7 case and a five year Chapter 13 case.  We have filed cases in which the client “passed” the Means Test by less than $10 per month.

Finally, we started this post by stating that most individuals filing for Bankruptcy have to complete the Means Test.  Who does not have to do it?  Under Bankruptcy law, if most of the individual’s debts are business, rather than personal, debts, they qualify for Chapter 7 without having to proceed with the Means Test.  Business debt may include SBA loans, personal guarantees for business debt, loans for rental properties, business credit cards, and so on.  When a person has business debt, it is compared with personal debt (home loan, medical bills, credit cards, etc.) and if the total business debt is at least $1 more than personal debt, the individual qualifies for Chapter 7.

A few final notes:

  • For a great many people facing Bankruptcy, especially those who have been unemployed or under-employed, or who have a steady paycheck that does not change from month to month, the Means Test is usually fairly straightforward.
  • When actual expenses are used in the second stage of the test, some figures are unquestioned and others are not.  For example, house and vehicle payments are generally clear cut monthly figures.  Higher than average utilities, medical expenses and insurance costs can be justified with actual bills.  On the other hand, using actual numbers for some expenses are typically not acceptable.  If the family of four tries to include $1,200/month for groceries because they typically shop at Whole Foods and regularly dine out, the reality is that they would face a significant lifestyle change if they had to file a Chapter 13 case.  The same applies for entertainment expenses and often even charitable contributions.  Similarly, monthly expenses for a beach house, recreational vehicle, third or fourth vehicles, and so on will usually not be allowed in calculating expenses and those assets may have to be given up.
  • Household size is not always as easy as it sounds. What if you have a 20 year old child in college who lives in a dorm most of the year? Do you claim him as a member of the household? Can you count the expenses for his education even though he is legally an adult?  What if you have an adult child who still lives at home and pays some rent when he is able?  Do you count that occasional rent as income?  Is he a member of the household for the Means Test? The answers to these questions often vary from court to court, and may depend on more facts.
  • Likewise, determining household income is not always easy.  Do distributions from retirement or disability count?  Workers compensation? Distributions from family trusts?  The occasional and sporadic rent from the adult child living in the basement?  Social security from taking care of an elderly relative?  It is important to discuss all income with a lawyer, and she will include the appropriate figures.
  • Timing can be very important.  Many people work on commission and may go several weeks with little or no income, with occasional large checks.  Since the Means Test uses actual income for the six month period prior to filing, some people may need to wait six months after they receive a large check so that income is not included.  Others may wait too long and get a commission check that takes them over the median.  This post is being drafted in the holiday season, and many people will get bonuses at work that may take them over the median.  The lesson here is that a person facing Bankruptcy should see a lawyer as soon as Bankruptcy is a possibility, and disclose all sources of income, past, present and future.
  • Business debt is not always clear.  A true rental property is normally a business debt, while a beach house that is occasionally rented is often a personal debt.  If a credit card is used for business and personal expenses, the individual charges will need to be divided as one or the other.
  • The Means Test is usually considered as a pass/fail test, and you “pass” by qualifying for Chapter 7.  However, there are often circumstances in which a Chapter 13 is a better option.  For example, a person may have to make up missed house payments or they are eligible to strip a junior lien from their house.
  • If you are curious about whether you qualify for the Means Test, there are online calculators that allow you to plug in your income and expenses to see if you qualify.  You can find one here.  Keep in mind that there are no guarantees that the calculator is updated and they have no ability to consider anything other than a few simple figures you provide.  They are not a substitute for a good lawyer.  Some words of warning for online calculators: never provide personal information such as name, address, telephone number or email address.  Most online calculators are linked to legal referral services, spam accounts or even outright scams.  Such is the nature of the internet.   If you enter your personal information along with your income and expenses, someone out there has a whole lot of personal information about you.  The only thing you need to provide is your state or ZIP code, although it is often fine to include your city.

Although this post may make the Means Test look daunting, again, for the great majority of people filing for Bankruptcy it is a very straightforward test, whether they “pass” or “fail.”  Our purpose here to is give you something more than the simplistic information found online, and allow you to consider factors that may apply to your situation.  Again, there is no substitute for a good Bankruptcy lawyer in your are who can review the Means Test with you in an initial meeting.  This allows you to plan and time a filing, if necessary, and discuss the options available to you.  If you are facing a possible Bankruptcy filing, you can contact us by going to the Contact Page, or use this guide to find a good lawyer in your area.