The Bankruptcy Means Test - What it Is and How it Works - Part 1
Part 1 –
What is the Bankruptcy Means Test?
In 2005, in order to combat perceived abuses of the bankruptcy process, Congress significantly altered the Bankruptcy Code. Perhaps the biggest change was the creation of a Means Test – a test to determine whether or not a bankruptcy filer had the financial means to pay back their creditors. Prior to this change, the choice between Chapter 7 and Chapter 13 depended on whether the debtor had any non-exempt assets, debts which could not be discharged in a Chapter 7, and whether the Court or Trustee felt the debtor’s refusal to repay his creditors constituted an abuse. However, Congress decided that it was no longer reasonable for debtors with the means to repay their creditors, even in part, to file a Chapter 7 and get away with not paying their creditors. Hence, abuse is no longer solely up to the court’s discretion – Debtors are now tested under a mathematical standard, and should they fail, the law now presumes the debtor has the means to repay some portion of his funds to his creditors, and will be abusing the system should he decline to do so.
The Means Test itself is handled in two parts. First, Debtors must demonstrate that their income is below the median income for a household of equivalent size in their state, as determined by the National Census Bureau. If a Debtor’s household income be below this median, there is no need to continue to the second part – there is no presumption of abuse. On the other hand, Debtors whose income is above median will be subject to the second part of the test, which calculates a set of reasonable monthly expenses based primarily on the IRS National Standards, and determines how much the Debtor would have left over after paying these expenses. If the Debtor pays these expenses and still has enough to pay his creditors 25% of their claims, assuming a minimum of $28,100.00 in debts and a maximum of $46,900.00 in debts, over a 5-year Chapter 13, then they do not have the means to pay off their creditors, and may file Chapter 7. However, if they do have enough to pay off their creditors, then filing a Chapter 7 is presumed to be abusive, and only exceptional circumstances will prevent such a filing from being dismissed.
Military Exceptions to the Bankruptcy Means Test
However, there are three limited situations where you will not have to pass the means test, and in fact will not even be subject to the means test. If you are a disabled veteran – defined by the Office of the United States Trustee as having 30% disability from service or being released or discharged due to disability – and your debt was primarily incurred during a period of homeland defense activity or while you were under active duty, you are exempt. Second, if you are a member of the National Guard or a reserve component, and are either on active duty or performing homeland defense activities, you are exempt from the means test. This protection also extends for a period of 540 days after you are released from duty or no longer performing defense activities, provided the length of active time was at least 90 days.
Finally, you are exempt from the means test if you are not a consumer debtor – that is, if the majority of your debts are not consumer debts. Consumer debts, as defined by the bankruptcy code, are debts incurred for personal, family, or household purpose, based on the purpose as judged at the time the debt was incurred. This includes most credit card payments, mortgages on your principal residence, vehicle loans, utility bills, medical bills, and even student loan debts. However, it does not include debts incurred for a business venture, including mortgages for property intended at the time of purchase to be an investment, or most taxes. If a majority of your debts are non-consumer under these guidelines, then you need not subject yourself to the means test.
Marital Status and Household Size
The means test depends heavily on the marital status and household size of the filing debtor, deciding what level of income is considered abusive, what expenses are permissible, and what income must be included in the bankruptcy. Marital status is the easier of the two to determine, as there are only four choices – single, married but not filing jointly and with declaration of separate households, married but not filing jointly without declaration of separate households, and married and filing jointly. In the first two cases, the household size begins at 1 and the spouse’s income is not considered; in the second case, the household size begins at 2 and the spouse’s income is considered.
Household size, on the other hand, has not been clearly defined, and is subject to different rules depending on which state governs your case. There are three primary methods of calculation, but under the recent Johnson v. Zimmer decision in the 4th Circuit, the method used is determination of the actual economic unit which makes up a given household. If an individual is regularly a part of the household economy – if they pool their resources with the household, and draw from said pool – then they are a household member. On the other hand, an individual living in the same home, but who keeps their income and expenses separate from the household, would not be a part of the household even if related to the debtor. When individuals are only partially members of the household, such as when custody is shared, the Fourth Circuit has supported a “fractional analysis,” counting dependents as partial members of a household in proportion to the support they receive from it. A dependent who resides with a debtor 204 days out of 365, for example, may be considered 0.56 dependents for this test. All numbers are then summed together, and the final number of dependents will be rounded up or down to the closest whole number.
Once you have determined your household income, your next step is to determine your household’s Current Monthly Income. Unlike projected disposable monthly income, which is forward-looking, Current Monthly Income starts at the last day of the month before you file, looks back six total months, and averages all income which you received over that period. All sources of income which you received over this period must be included in the average, including child support, retirement benefits, regular contributions to the family expenses, and unemployment compensation. Even one-shot income, such as gambling proceeds, cash gifts, or bonuses must be included in the calculation if they fell within the 6 month period. However, it does exclude tax refunds, loans made to you, and payments to victims of war crimes, international terrorism, and domestic terrorism. It also includes any benefit under the Social Security Act, including SSI, SSDI, and TANF.
The first category, which is valued on line 3 of the Means Test, covers monthly wages, salary, tips, bonuses, overtime, and commissions. When determining these values, you must take your gross monthly income before deductions, whether pre- or post-tax. Once again, average wages over the past 6 months should be used, with any bonuses, overtime, or similar income received in that time period included in the average.
The second category, on line 4, is income which you receive from the operation of businesses, professions, or farms. Unlike wages, you do not simply consider gross income here – you are permitted to subtract all ordinary and necessary business expenses from your revenue to derive your profit, just as you would under ordinary circumstances. However, according to the Trustee’s guidelines, you cannot include depreciation – only actual expenses incurred may be used. Further, you cannot enter a negative number for business, professional, and farming income – if your business causes you to lose money each month, you must still list it as $0.00 income to you. However, this rule applies only in the aggregate – if your business has months where it makes a profit and months where it loses money, the average depends on both the positive and the negative months, not merely the positive months. Similarly, if you have multiple businesses, some profitable and some which lose money, you would not zero out the businesses which cause you to take an average loss before summing up your total business income.
Line 5, the third category, is rent and other income from real property. Like business income, you do not merely list the gross amount received, but instead reduce it by all reasonable and necessary business expenses. This may include mortgages which you pay on the property, utilities, and other necessary costs; however, if you are renting out part of your primary residence, you would at best be able to include any increased utility payments resulting solely from the additional tenants. Again, you may not enter negative rental income on the CMI, but you may balance out profitable rental property with rental property which cannot cover the cost of its mortgage.
Line 6 covers the aggregate of all interest, dividends, and royalties which you have received in the last six months. Please note that if you are subject to an automatic dividend reinvestment program, your reinvested dividends are still income, and must be entered appropriately. However, an increase in the value of the asset providing the interest or dividends, such as a stock certificate appreciating in value, is not income – you must account for it on Schedule B, not the means test.
Line 7 covers your pension and retirement income. This includes all income, whether taxable or non-taxable, which results from these accounts, even if the account is exempt from the bankruptcy process. However, as previously stated, Social Security benefits are expressly excluded from the means test, and you need not consider them here.
Line 8 covers all amounts paid by another person or entity on a regular basis for the household expenses of you or your dependents. This includes child care, alimony or spousal support, payments from a roommate, partner, or relative, or payments made directly to creditors on behalf of the debtor, such as payment of mortgages or car notes by another party. Such income must be listed whether or not you are subject to a written agreement with the contributor, and regardless of whether the contributors are members of your household or not.
Line 9 covers unemployment compensation, and solely includes any unemployment benefits which you receive. While unemployment compensation received as a benefit under the Social Security Act is technically not included in this, the US Trustee’s Office has taken the position that unemployment compensation is not considered a benefit under the SSA, and will oppose any such exclusion.
Finally, line 10 covers any other source of income which you have received in the last 6 months but have not listed elsewhere. This is where you would include all gambling proceeds, cash gifts, proceeds from litigation not intended as compensation for personal injury or death, trust income, and benefits such as food stamps. However, any item which is excluded from being considered income, as stated above would obviously not be added in here.
The First Test
Once all of your income has been entered into the form, you are ready to begin the initial phase of the Means Test – determining whether you are above or below median income. Median income, which is determined based on the National Census Bureau’s determination of a median household income for a given family size in the given state in which you are filing. While the Census Bureau only provides figures for families of 1 to 4, the Means Test adds an additional $675.00 per additional household member to these figures as of April 1, 2013. For your convenience, we include below the numbers for Virginia as of April 1, 2013.
Median Income (Annual)
Median Income (Monthly)
$91,661 + $8,100.00 per member over 4
$7,638 + $675.00 per member over 4
While these figures are current as of April 1, 2013, they are subject to periodic change based on new census tables published by the Census Bureau, and periodic adjustments to the Bankruptcy Code. Please consult a qualified bankruptcy professional before filing, so that you can be advised of any changes which have occurred since that time.
Failing the First Test
If your gross monthly income for your family size is below the number in the table above, then you may breathe easy – you have passed the means test, and your work is done. While this does not guarantee success for your bankruptcy, it does mean you are not subject to any presumption of abuse of the bankruptcy process. On the other hand, if your income is above these numbers, the situation becomes much more complicated. Now you will have to meet the second half of the means test – showing that you do not have any significant disposable monthly income which can be used to repay your creditors.