Bankruptcy Help for Business and Individuals

Means Test

Among the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was a set of provisions defining “current monthly income” and establishing a means test to determine whether relief under Chapter 7 should be presumed abusive, thereby disqualifying a debtor from filing Chapter 7 bankruptcy and requiring a filing under Chapter 11 or 13.
Among the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 was a set of provisions defining “current monthly income” and establishing a means test to determine whether relief under Chapter 7 should be presumed abusive, thereby disqualifying a debtor from filing Chapter 7 bankruptcy and requiring a filing under Chapter 11 or 13.

In Chapter 7, if the debtor’s current monthly income exceeds a defined level, the debtor is subject to the means test. In order to avoid the means test in 2020, the Median Income for the size of household must be less than

1 – $59,286
2 – $77,860
3 – $86,665
4 – $99,512

Add $9,000 for each individual in excess of 4.

The means test is designed to limit which debtors may file Chapter 7 bankruptcy to those who aren’t able to pay their debts. It does this by deducting specific monthly expenses from a debtor’s current monthly income to arrive at the debtor’s monthly disposable income. If a debtor has disposable income, the debtor won’t be allowed to utilize Chapter 7 bankruptcy and must file under Chapter 13 and propose a repayment plan to pay back a portion, if not all, of their debts.

Current Monthly Income

In Chapter 7, if the debtor’s current monthly income exceeds a defined level, the debtor is subject to the means test, and the bankruptcy code specifically requires debtors to file a statement of current monthly income and calculations to determine the applicability of the means test presumption. In Chapters 11 and 13, current monthly income provides the starting point for determining the disposable income that debtors may be required to pay to unsecured creditors. Moreover, Chapter 13 debtors with current monthly income above defined median income levels are required by the bankruptcy code to use the deductions from income prescribed by the means test in order to determine what part of their income is “disposable,” and the level of current monthly income determines the “applicable commitment period” over which projected disposable income must be paid to unsecured creditors.

Although Chapters 7, 11, and 13 use current monthly income for different purposes, the basic computation is the same in each. Current monthly income is the monthly average of certain income that the debtor (and in a joint case, the debtor’s spouse) received in the six calendar months before the bankruptcy filing, including (a) gross wages; (b) business income; (c) rental income; (d) interest, dividends, and royalties; (e) pension and retirement income; (f) regular payments of the household expenses of the debtor or the debtor’s dependents; (g) unemployment compensation, and (h) all other forms of income (the “catch-all”). The definition includes in this average (1) income from all sources, whether or not taxable, and (2) any amount paid by an entity other than the debtor (or the debtor’s spouse in a joint case) on a regular basis for the household expenses of the debtor, the debtor’s dependents, and (in a joint case) the debtor’s spouse if not otherwise a dependent.

At the same time, the definition excludes from the averaged income “benefits received under the Social Security Act” and certain payments to victims of terrorism, war crimes, and crimes against humanity. Alimony and child support are also given special treatment. Child support is not generally considered “income” to the recipient. Thus, child support is only part of current monthly income if it is paid on a regular basis for the household expenses of the debtor or the debtor’s dependents. On the other hand, alimony and other forms of spousal support are considered income to the recipient, and thus are within current monthly income regardless of the regularity and use of the payments.

Deductions from Current Monthly Income

The means test operates by deducting from current monthly income defined allowances for living expenses and payment of secured and priority debt, leaving disposable income presumptively available to pay unsecured non-priority debt. These deductions from current monthly income are set out in the bankruptcy code and include the debtor’s applicable monthly expense amounts as specified under the IRS National Standards and Local Standards, and the debtor’s actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service for the area in which the debtor resides.

The IRS National Standards provide a single allowance for food, clothing, household supplies, personal care, and miscellany, depending on household size, which can be entered directly from a table supplied by the IRS. There is also a National Standard for out-of-pocket health care expenses, which provides two different per-person allowances, depending on age group: the allowance for persons 65 or older is greater than the allowance for those under 65.

The IRS Local Standards provide one set of deductions for housing and utilities and another set for transportation expenses, with different amounts for different areas of the country, depending on the size of the debtor’s household and the number of the debtor’s vehicles.

The IRS does not set out specific dollar allowances for “Other Necessary Expenses.” Rather, it specifies a number of categories for such expenses, and describes the nature of the expenses that may be deducted in each of these categories. The bankruptcy code allows a deduction for the debtor’s actual expenses in these specified categories.

In addition to the expense deductions allowed under the IRS standards, the means test makes provision for six special expense deductions, including reasonably necessary health insurance, disability insurance, and health saving account expenses and contributions to tax-exempt charities.

Finally, the bankruptcy code directs that the deduction subtotals be added together to arrive at the total of allowed deductions from current monthly income under the means test.

Application of Means Test in Chapter 7, 11, & 13

If the debtor has any disposable income after applying the means test, the debtor is not eligible to file Chapter 7 bankruptcy. However, in Chapter 7, certain debtors are excluded from means testing, making it unnecessary to compute the current monthly income. Debtors who declare under penalty of perjury that they are disabled veterans are excluded, as well as debtors who do not have primarily consumer debts. Also, if a debtor’s annualized current monthly income does not exceed a defined median state income, the means test does not apply. Otherwise, Debtors whose current monthly income exceeds the applicable state median are required to complete the means test to determine if they have any disposable income sufficient to repay creditors. The means test is a determination of whether the debtor’s current monthly income, less the allowed deductions, gives rise to a presumption of abuse under Chapter 7. Depending on the outcome of this determination, a Debtor may or may not qualify to file under Chapter 7. If the means test determines a debtor has sufficient disposable income, the debtor won’t be allowed to utilize Chapter 7 bankruptcy and must file under Chapter 13 and propose a repayment plan using the disposable income.

In Chapter 11, the means-test deductions of are not employed in determining the extent of an individual Chapter 11 debtor’s disposable income. The bankruptcy code requires payments of disposable income based on calculation of disposable income under judicially determined standards, rather than pursuant to the means test deductions. However, the code does require that current monthly income be used as the starting point in the judicial determination of disposable income, and so the Chapter 11 bankruptcy requires this calculation, as described above.

In Chapter 13, the debtor must state whether the applicable repayment period under is three years or five years and whether the code requires the means-test deductions to be used in determining the debtor’s disposable income. In the absence of full payment of allowed unsecured claims, the code imposes a five-year applicable commitment period—rather than a three-year period—if the debtor’s annualized current monthly income is not less than a defined median state income. The means test compares the debtor’s current monthly income to the applicable state median, allowing a determination of whether the means-test deductions must be used in calculating disposable income. For debtors with current monthly income above the applicable state median, the code provides for calculation of the means-test deductions as described above. In Chapter 13, the means test includes deductions from current monthly income for payment of secured and priority debt, as well as a deduction for administrative fees that would be incurred if the debtor paid debts through a Chapter 13 plan.

We will help you correctly fill out the paperwork for the means test. The form is six pages long and asks for a lot of financial information regarding your household income and expenses.

To learn more, contact our offices at (949) 450-8500 for your FREE consultation.

The financial challenge that I faced, followed by the bankruptcy option that I exercised, was for me a low point in my life. However, my decision to engage Paul Kurtzhall with the law firm of Hallstrom, Klein & Ward LLP was instrumental in getting my life back on the right track.

Call now: (949) 450-8500

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