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Bankruptcy Means Test

The Bankruptcy Means Test is used by the courts to determine eligibility for Chapter 7 or Chapter 13 bankruptcy. It consists of determining current monthly income, then comparing the current monthly income on an annualized basis to the median income of a like-sized family in West Virginia, or if the amount is over the median income, then running the applicable means-test deductions. Our office has a computer program that figures the means test, but for your information, we have described below how it works. 

First, for Chapter 7 bankruptcy, the current monthly income must be determined. The term current monthly income is defined as all the income that comes into your household from whatever source—whether the income is taxable to you, or not, and the whether the income is taxable to anyone else, or not—in each of the last six months divided by six. From that income any benefits received under the Social Security Act or VA Disability payments are subtracted as well as certain payments to victims of terrorism. Persons who have served in the military since Sept. 11, 2001, or who have been involved in certain Homeland Security activities in the last 540 days may not be required to take a Means Test.

If the current monthly income when multiplied by 12 is below the state median family income, then you normally qualify for Chapter 7. If not, you must complete a Means Test set out in 11 U.S.C. §707(b). 

You are allowed deductions for certain living expenses, which may be less than your actual living expenses or more than your living expenses. Certain of these expenses are set forth under the IRS National Standards for Allowable Living Expenses, Local Housing and Utility Standards, the IRS National Standards for Out-of-Pocket Health Care, and IRS Local Transportation Expense Standards. 

Other than a 5 percent bump up for food and clothing (if you can show it is reasonable and necessary) and a bump up for housing and utilities (if you can document the expenses) you are not entitled to any other deduction for living expense, except for health care costs not covered by IRS Standards or insurance and certain necessary telecommunication expenses over the amount of basic phone service, but not cell phone service, which is contained in the National Standards.

You are entitled to other deductions, however, including expenses for the care and support of elderly, chronically ill, or disabled household members or members of your immediate family, if they cannot care for themselves. You may also deduct up to $2,275.00 per year reasonable and necessary schooling expenses for any dependent child under the age of 18. In addition, you can deduct most payroll deductions, including taxes, term life insurance, disability insurance, and medical savings accounts. A deduction for retirement benefits, such as a 401(k) plan is not permitted unless the deduction is mandatory, such as the deduction imposed on state or local government employees. Charitable deductions are permitted, if reasonable, and church tithes are permitted up to 15 percent of income.

You are not permitted to deduct any loan payments, except secured debts. Secured debts with more than 60 payments remaining are deducted in the amount of the monthly payment. If less than 60 payments remain, the remaining payments are added together and divided by 60 to determine the amount of the deduction. Certain other types of debts that are given priority, such as back taxes or owed child support or alimony, are to be divided by 60 and that sum is deducted.

After all deductions are made, if the amount remaining is 0 or a negative number, you have passed the Means Test.

If the number is positive, you have passed the Means Test if, when multiplied by 60, the resulting number is less than $9,075.00. If 25 percent of your unsecured debt totals more than $9,075, but less than $15,150, you have passed the Means Test, if the resulting Means Test number, multiplied by 60 is less than that 25 percent of your unsecured debt. When your resulting Means Test number multiplied by 60 is at least $15,150.00, or less than $15,150.00, but more than 25 percent of your unsecured debt, then you have failed the Means Test. In this case, the only other way to pass the Means Test would be for certain adjustments to income or expenses to be allowed due to “special circumstances.” You would be required to itemize and document every special circumstance and attest to the same under oath.

Disposable income for the purposes of Chapter 13 bankruptcy is essentially the monthly figure derived from the Chapter 7 bankruptcy Means Test multiplied by 60, if your income is above the median income; or if your income is below the median income, your actual income less expenses multiplied by 36. The multiplier is known as the “applicable commitment period.” Unlike the Chapter 7 Means Test, you may deduct retirement or 401(k) payments, whether or not they are mandatory, as well as retirement or 401(k) loan repayments. The US Supreme court has ruled, however, that this test is not the exclusive arbiter of the Chapter 13 Plan payment. In fact, Courts are more than likely to confirm a plan payment which equals a debtor’s income less his reasonable living expenses, provided, that the payment meets the other requirements of Chapter 13.

Additional Means Test Resources

Allowable Living Expenses
Local Housing and Utilities Standards
Local Transportation Expense Standards
Out-of-Pocket Health Care
Median Family Income