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Means Test for Bankruptcy
By Mark Markus | October 11, 2008
The means test is a budget analysis created by Congress purportedly to determine whether one is ineligible to file for bankruptcy relief under Chapter 7, Chapter 11 or Chapter 13. I say “ineligible” as opposed to “eligible” because in most court districts, “passing” the means test is not conclusive on the issue of eligibility—meaning, that there are other eligibility factors that come into play even if the presumption of abuse does not arise on the means test. This will be discussed more below.
The means test only applies if one’s debts are primarily (i.e. more than 50%) consumer debts. Consumer debts include secured mortgage debt obligations on a personal residence, as well as most credit card-type debts. The means-test also only applies if the total income received in the 6 calendar months prior to filing the bankruptcy case (explained more fully below) is above the median income for your state, given your household size. See the means test flow chart created by Judge Maureen Tighe of the United States Bankruptcy Court, Central District of California, as presented in the informative blog of the Moran Law Group.
What is the means test? It is extremely complex. The basic definition can be seen here. But essentially, it takes all income received (and this means ANY income, regardless of whether it’s taxable income, so that includes gifts, withdrawals from a 401k, and almost any other type of income EXCEPT social security income) in the 6 calendar months prior to filing the bankruptcy case–including that of your spouse, if any– and subtracting out certain allowed expenses. These “allowed expenses” are mostly IRS-based allowances for living expenses, food, clothing, shelter, etc. and have little connection with reality. There are specific allowances for secured debt payments, such as mortgages and car payments, but almost every aspect of the means test has been, is being, or will be challenged in the courts, because it is frequently nonsensical, internally inconsistent, and confusing. It is not as simple as determining that your income is below or above the median income for your area and household size (and determining your household size is another hotly contested issue). You need a qualified bankruptcy attorney familiar with the court decisions in your area, to properly evaluate your eligibility for bankruptcy. (For example, self-employment income is not analyzed exactly the same way as wage-earner income from a job)
Which brings me back to the point of eligibility. Passing the means test is just the first step. It is possible to pass the means test but still be showing–for example–a surplus in your current monthly income and expenses. For example, let’s say you were unemployed for the 6 months prior to filing your bankruptcy case, but you just landed a new job that pays you $100,000 per year. In that instance, you would likely pass the means test and show you are eligible to possibly file a Chapter 7 case. However, you would most certainly draw an objection (via a Motion to Dismiss your case) from the US Trustee’s Office as having too much income.
The means test and assessing eligibility to file bankruptcy is a field of land mines and evolving interpretations of law. As they say on television, “We are trained professionals. Don’t try this at home”
Topics: Los Angeles Bankruptcy Issues, debts in bankruptcy, means test | No Comments »
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