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In this article we will show you everything you need to know about the bankruptcy means test. This financial means assessment is one of the most confusing things about filing for Chapter 7 bankruptcy.

We will show you what this test does, what it is exactly, how it works, and why there is no calculator as such but a calculation for the means test.

As experienced NY bankruptcy lawyers, with over 30 years of history and successes, we can help you. You can book your private consultation with us online or contact us today by email or phone.

What is the bankruptcy means test

This Chapter 7 means test is simply known as a “means test.”

  • It is an analysis that determines your eligibility to file under Chapter 7 bankruptcy based on your monthly income.
  • It’s called a means test because at its most basic level it looks at whether you have the means to pay your debts.

Why does the means test exist?

Congress under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) implemented this means test with a clear goal:

  • To prevent people who can afford to pay at least some of their debts from abusing the Chapter 7 bankruptcy system.

If the means test determines that you can make a payment through Chapter 13 bankruptcy, a presumption of abuse arises. In this case, the Chapter 7 applicant must show the bankruptcy court something concrete. That is, your financial situation requires relief available only through Chapter 7.

It is crucial that you complete the means test correctly for your bankruptcy case to continue smoothly. In this sense, hiring a bankruptcy attorney is imperative.

Note: In 2018 US courts saw nearly 480,000 Chapter 7 cases. Chapter 11 bankruptcy and Chapter 13 bankruptcy cases combined were less than 300,000. Chapter 7 bankruptcy is the most popular, however, not everyone qualifies due to their income and income history.

How does the means test work?

  • The bankruptcy means test clarifies if you are eligible for Chapter 7 bankruptcy or if you are limited to Chapter 13.
  • There are exceptions where you are not required to pass the means test.
  • Filing the application can be confusing and complicated so having a good lawyer by your side is highly recommended.
  • It consists of two parts that aim to see if you have any disposable income that you can use to pay the debt.
  • The test is only for those who have mainly consumer debts (credit cards or medical debts for example). You don’t need to pass the means test if your debt comes from a business you own.

Note: Any errors in the documentation can ruin your application. Count on our expert bankruptcy attorneys today. They will be the ones to fill out the form and send it to the court along with the rest of the filing documents. 

Here is what the applicant must submit to prove their eligibility. 

Process for Completing the Chapter 7 Means Test

The Chapter 7 bankruptcy means test calculation is actually a two-step analysis although we have included a third part for the review by the trustee. 

The reality is that many low-income families will not have to worry about the second step. Here’s how it works.

Part 1: Compare Your Monthly Income With Your State Median Income.

The first part of the means test checks to see if your household income is below the median income for your state.

Official Form 122A-1: Complete the declaration form of your current monthly income. This adds up all the monthly income you receive as household including:

  • Salaries, bonuses, commissions and tips;
  • Maintenance, such as child support or alimony;
  • Rental and property income;
  • Income of a company;
  • Interest, royalties and dividends;
  • Retirement income;
  • Unemployment benefits;

Note: If you received a CARES Act check in 2020 due to the COVID-19 economic crisis, it will not be counted as income for the means test. If your income is uneven due to one-time bonuses and commissions, you may need to use your average income over the last 6 months.

monthly income vs state median income

Also write down your family size and the state where you live. This will determine the average household income that is compared to your CMI (Current Monthly Income). Here you can obtain two results:

  1. If your annualized CMI is LESS than the designated median household income: Sign the form without problems. You can go ahead with filing Chapter 7 bankruptcy without presumption of abuse.
  2. If your annualized CMI is HIGHER than the designated median household income: There will be more documentation to fill out before completing the bankruptcy means test.

Step 2: Complete the calculation of the means test

Assuming option 2 from the previous step this confirms in front of the courts something clear: Although your income is higher, your responsibilities, that is, debts and expenses are such that you are legitimately facing financial problems.

Official Form 122A-2: The Chapter 7 Means Test Calculation must be completed that reaffirms your income in detail:

  • The number of individuals you claim as dependents. That is, the number of individuals used to determine your income deductions;
  • Out-of-pocket medical costs;
  • Insurance;
  • Expenses for clothing, food, and other essential items for each person in your household;
  • Taxes;
  • Transportation expenses;
  • Childcare;
  • Payments ordered by the court;
  • Education costs;
  • Guaranteed debt payments;
  • Donations.

All this information requires accurate reports and it is not enough to make a simple reference or show statements from your bank account. 

  • National and local IRS standards should be used to determine what the government thinks you should pay for calculated expenses; 
  • You should also detail any additional payments to make above those thresholds.

All of this will determine your eligibility to file under Chapter 7 (Or conversely under 13).

Step 3: The information provided is reviewed by a trustee

As soon as you complete all the required forms, a trustee appointed by the court will review the information provided. Based on these, you will get one of the following two results:

  1. Pass: Your Chapter 7 bankruptcy can continue. The trustee has confirmed that you are eligible.
  2. Fail: The trustee determines that you have sufficient income for a Chapter 13 payment plan. A presumption of abuse is assumed and that will be your alternative. 

We expand on these two points below.

Note: Review our section Filing for bankruptcy Chapter 13 for specific information about the Chapter 13 payment plan.

Passing the Chapter 7 Bankruptcy Means Test

  • Passing the means test you will get the green light to file for Chapter 7 bankruptcy; 
  • This will forgive most if not all of your unsecured debts, such as credit card debt or medical bills.

However, this does not mean that it is the best path for you. You may be better off filing for Chapter 13 bankruptcy since under this chapter:

  • You will be able to catch up on debts such as your mortgage, back taxes, past due loans, and keep your assets.

Contact our New York asset protection attorney to find out which is the best option for your specific case and your objective.

If you don’t pass the Chapter 7 bankruptcy means test

  • If you don’t pass the means test, there is no appeals process;
  • Chapter 13 bankruptcy won’t be your unique option, you can always delay filing for a while;
  • The expenses and income you use to complete the means test reflect your financial situation for the last 6 months. That is, you can retest after some months if you think you will meet the threshold for debt forgiveness in Chapter 7 bankruptcy;
  • If you cannot wait to file for bankruptcy and cannot pass the means test, you will already be limited to Chapter 13. That is, you will pay your debts within 3 or 5 years.

Note: Learn more on our website about the differences from bankruptcy Chapter 7 vs 13.

The Importance of Current Monthly Income (CMI)

current monthly income

The CMI is a key calculation that will determine your eligibility to file for bankruptcy. You calculate the CMI based on the monthly income you receive from all qualified income sources during the look back period. This is the 6-month period ending the month prior to your submission.

Sources of Income Relevant to CMI

Here are the sources of income that count in CMI calculations:

  • Support, such as alimony or child support expenses. Also contributions from another person for household expenses;
  • Income from a profession, business or farm;
  • Property or rental income;
  • Unemployment benefits;
  • Pension or retirement income;
  • Interest, dividends and royalties;
  • Other sources of income that are not excluded.

Note: There are sources of income that are not part of the calculation of the CMI. A clear and fairly common example is any benefit through Social Security. For example, SSI and disability payments,

Complexity of CMI calculations

These expenses are not as straightforward to calculate as they may seem. Having our bankruptcy experts by your side will be crucial to achieving your goal. Let’s see below some examples of complications in the calculation of the CMI.

  • State disability payments do count towards the CMI but not Social Security disability benefit payments.
  • There are special sources of income that many people never consider. Examples are payments for being a victim of domestic violence or a crime against humanity. Those incomes are excluded.
  • The timing of your presentation is key to obtaining the best CMI calculation. A clear example would be seasonal income. Be sure to time your presentation so that it occurs when your income is low and not high. Otherwise you may be ineligible for Chapter 7 and you may not even be able to make Chapter 13 bankruptcy payments either.
  • Your spouse’s contributions and income are accounted differently by the CMI depending on whether you file joint or individual bankruptcy.

Note: For this last point, you may be interested in reading our article “Does filing for bankruptcy affect your spouse” to discover the real effects of bankruptcy on your spouse.

Median Income by State and Family Size

Median income in the state where you live is crucial for:

  • The Chapter 7 means test;
  • The calculation of disposable income in Chapter 13.

Family size also influences the median income used in these tests. That is, the bigger your family size, the higher the median income threshold.

In this link you can see the median income for 2020 determined using data from the US Census Bureau.

Means test exemptions

Some people with means test exemptions are not required to take the means test. Those will fill out the official Form 122A─1 Supp. Meaning, there are certain situations in which you may be exempt from taking a means test. 

The Civil Relief Act for Service Members (SCRA) provides two situations:

  • Service members, members of the National Guard or reservists: Are exempt in the following cases:
    • When serving on active duty or;
    • If they carry out a defense activity for the homeland for at least 90 days. The exemption lasts for 540 days after the end of that service.
  • Disabled Veterans: Exempt if debts were primarily incurred:
    • While the veteran was on active duty or;
    • While carrying out a national defense activity.

Bankruptcy Means Test Mistakes To Avoid

bankruptcy means test calculation

As mentioned earlier, the means test is a lengthy and complicated process. Although it has instructions for each item, it is very easy to make mistakes. An experienced bankruptcy attorney will be your best ally to streamline this entire process.

Still, let’s look at some tips to help you avoid bankruptcy means test mistakes. 

Reporting Your Means Test Income Incorrectly

  • During the 6 months before filing for bankruptcy, you will use your average income to determine if you qualify for Chapter 7 bankruptcy. 
  • You will use the full 6 months ending on the last day of the calendar month before the filing date. 
  • This figure doubles and compares to the median income in your state for a household of the same size. 
  • You will find current figures on the US Trustee Program website.

You will need to follow the instructions on the form and calculate your 6-month average for each source of reportable income. Using the 6 months for calculations, the income figure on your means test may differ significantly from the true year to date and your current income.

Miscalculation of the Means Test Household Size 

  • In the means test, the larger your household size, the more money you can earn;
  • Using the correct median household size on the means test can directly affect your eligibility for Chapter 7 bankruptcy;
  • Bankruptcy courts use different approaches to determine who counts as a member of your household;
  • Many (but not all) courts allow you to count members of your household under the “heads on beds” rule.
  • These approaches vary depending on where you live.

Note: Although calculating your household seems straightforward, don’t be overly confident. Call the U.S. Trustee’s office or contact our bankruptcy attorneys in your area before filing your case. You can find your bankruptcy court using the federal court finder tool.

Making the mistake of incorrectly including Social Security income on the means test

  • When you take the means test you should not include any Social Security benefits that you receive for yourself or on behalf of others, whether it is a dependent child or in the form of income;
  • The clear advantage is that this reduces your income and increases the probability of passing the means test.

However, keep in mind that regardless of the results of the means test, you must also complete Schedule I: Your Income. On that form, you will list your Social Security benefits.

Not making use of the Chapter 7 marital adjustment deduction

  • If you are married but file bankruptcy without a spouse and still share a household, you must still include your non-filing spouse’s income on the means test. 
  • If your spouse has a significant amount of income, it could make it difficult to pass the means test.
  • In the marital adjustment deduction section of the means test, you can exclude the part of your non-filings spouse’s income that is not used for the household.

Failure to Claim Means Test Deductions

Review the instructions for each expense deduction carefully to ensure that you are not claiming any expenses that you are not entitled to in the means test. This will avoid a challenge from the bankruptcy trustee. 

Chapter 7 Tax Reporting

Many debtors use the amounts withheld from their monthly paychecks to calculate income tax expenses on the means test.

However, you can only deduct your actual tax liability on the means test.

You may be overestimating your tax deduction by using withholdings if you receive a large tax refund each year.

New York Lawyers to Help You With the Means Test

Passing the bankruptcy means test is essential if you want to file a Chapter 7 application. Many people make mistakes in their documents that prevent them from qualifying for a Chapter 7 case.

Being a complex process and often stressful, you will need the help of our New York experts. The bankruptcy, estate planning and business law firm of Ortiz & Ortiz is specialized in debt relief. With 30 years of experience and offices in Astoria, Brooklyn and Manhattan, we will guide you through the entire process. 

If you fear that you will not pass the means test, have doubts, or are aware that the slightest mistake could defeat your objective, do not hesitate to call us. You can contact our latino bankruptcy attorneys today.