Rob Goldman Legal Solutions
Wills and estate planning for seniors and families

Peace of mind is just a phone call away

Bankruptcy Relief “Means Test” and Eligibility

The purpose of the Means Test is to determine whether, based on one’s income and reasonable and necessary expenses, it would be an abuse of the privilege to obtain bankruptcy relief through a Chapter 7 discharge of debts. It is not true that the changes to the bankruptcy laws in 2005 prevent people who earn more than the State median income for one’s household size from qualifying for bankruptcy relief! The Means Test is not intended to make it more difficult for below-median income debtors to obtain a Chapter 7 discharge or to qualify for bankruptcy relief. As a practical matter, the new bankruptcy law does make the bankruptcy process more burdensome and costly, but most people who would have qualified for Chapter 7 bankruptcy relief under the old bankruptcy law will still qualify under the new bankruptcy law.

The Means Test is a formula (Form B22) designed to require high income debtors to repay their creditors as much as they reasonably can afford by filing for debt relief under Chapter 13 and proposing a reasonable repayment plan rather than trying to wipe out all their unsecured debts through a Chapter 7 discharge. The Means Test actually tests for financial eligibility for Chapter 7 bankruptcy relief based on income by comparing the Debtor’s income and expenses to IRS standards for various categories of living expenses. If you have more income than the allowed deductions from income, you will have disposable income. If your disposable income exceeds certain amounts (see discussion below) you will likely fail the Means Test. The Bankruptcy Code requires that a debtor who has “disposable income” as defined by the Code, dedicates all such disposable to pay their unsecured creditors.

So, if you are living from paycheck to paycheck and don’t own anything much, you will most likely qualify for a Chapter 7 discharge. If you fail the Means Test, filing for Chapter 7 bankruptcy relief is presumptively abusive. That means you are presumed able to repay your debts, or at least a part of your debts. Unless you can rebut the presumption, you will have to consider whether you are eligible for Chapter 13 bankruptcy relief and can propose a viable repayment plan. Whether you live in Dundalk or Bel Air or anywhere in between, and experienced bankruptcy lawyer and explain your rights and options.

How Does the Means Test Work? To be eligible for Chapter 7 bankruptcy relief one needs to pass the two-prong Means Test contained in Form B22, namely: 1) the Median Income test, and 2) the Disposable Income test.

First, you need to understand what exactly the “Means Test” is. The Means Test uses median income standards for a certain household size in your state as published by the State from time to time to determine whether your income and expenses are above or below the IRS standard. Specifically, your median income is determined by taking the average of your gross income, – and the income of all members of your household, for the six calendar months prior to filing. If your income changed during the applicable six month period, and your average income for that six month period does not fairly reflect your projected future income, this could be a problem that may result in your not passing the Means Test. Sometimes a little strategic planning is necessary to enable one to pass the Means Test.

The current Maryland Median Income amounts, as of Nov 2012, are as follows:

  • Household Size Median Income
  • 1 $57,088
  • 2 $72,191
  • 3 $85,438
  • 4 $106,707
  • >4 $7,500 for each additional member

Certain income is excluded from the Means Test, for example, Social Security, Disability, and certain military veteran’s income. A veteran (1) who is disabled (as defined in 38 U.S.C. §3741(1), and (2) whose debt was incurred primarily during a period while on active duty (as defined in 10 U.S.C. §101(d)(1)), or while performing a homeland defense activity (as defined in 32 U.S.C. §901(1)), is exempt from the Means Test. However, if such a veteran has disposable income based on Schedules I & J (actual income less actual expenses), see discussion below, he or she will not qualify for Chapter 7 bankruptcy relief.
Clearly, the Means Test is an artificial test that uses a deemed income amount that may be completely inaccurate and artificial expenses based on what the IRS deems to be reasonable and necessary. Since the Means Test is a kind of standardized test for determining “disposable income’ for repayment purposes in bankruptcy, it is not relevant in the context or loan modifications or stopping foreclosures or auctions.

Even if one fails the Means Test, there are exceptions and special circumstances that may enable someone who fails the Means Test to proceed with a Chapter 7 bankruptcy case. Creditors who lobbied for the changes to the bankruptcy law wanted to make it as difficult as possible for debtors to obtain bankruptcy relief. This goal may have backfired, and there are many instances of outcomes that have worked out more favorably to debtors under the new law than the old law. Common sense dictates that debtors should seek the advice of an experienced bankruptcy lawyer rather than decide for themselves whether they are eligible for bankruptcy relief.

If you pass the Median Income test, you need to consider the Disposable Income test. The Disposable Income Test can be confusing. If you pass the Means Test you need not complete Form B22. In this event, filing Chapter 7 is presumptively not abusive. However, you are not home free. Although there is some uncertainty and differences of opinion in difference jurisdictions, in Maryland the current rule is that even if you pass the Means Test, if you have “disposable income” based on your Schedules I and J, namely your actual income less actual reasonable and necessary expenses, you will not be eligible for Chapter 7 bankruptcy relief and will have to consider a repayment plan in a Chapter 13 reorganization.

Disposable income for the purposes of the Means Test is calculated by taking your countable gross household income, deducting all allowed expenses based on IRS published national and local standards. Allowed expenses are various categories of expenses, such as allowances for housing, utilities, food, clothing, medical, and transportation expenses, among others, and including mortgage, automobile and other secured payments. The amount remaining is considered to be “disposable income.”

This “disposable income” amount must still exceed certain minimum threshholds: – Even if you have money left over in your budget based on this calculation, you will still qualify for a Chapter 7 discharge if: a) the monthly amount available to pay to your unsecured creditors is less than $11,725 over a period of five years ; b) you cannot pay at least $7,025 over five years to your unsecured creditors and that amount represents at least 25% of what you the unsecured creditors; or c) if your disposable income is less than $117 a month.

Even if you pass the Means Test after all the above considerations, if you have more than $195 month is disposable income under your actual budget, you will not be eligible for Chapter 7 relief and will seek debt relief under Chapter 13 and propose a Chapter 13 Plan.

This article is intended to provide a basic understanding of the Means Test and related issues for informational purposes. The Bankruptcy laws are voluminous and complex with many differences in interpretation. There are exceptions and special circumstances based on case law, and interpretations of the law that might allow a different approach in certain circumstances, so always consult with an experienced bankruptcy lawyer rather than form your own conclusions. Rob Goldman Legal Solutions, with locations in Dundalk, Bel Air, Owings Mills and Baltimore City, offers a comprehensive Rights & Options consultation to throughly review your situation and explore whether bankruptcy, debt workout, loan consolidation, reverse mortgage or other approach is best for you to get out of debt, get breathing room to catch up on your debt, deal with IRS tax debt, avoid creditor harassment, foreclosure, repossession, wage garnishment and achieve the debt relief you need for “Peace of Mind.”

The Means Test also determines the applicable “commitment period.” The commitment period refers to whether a debtor has to commit all disposable income to repay the unsecured creditors over a period of three or five years. A debtor who passes the Means Test may still not qualify for a Chapter 7 discharge if, for instance, he has more equity in his home, vehicle, savings or other assets than the allowable exemptions. In such cases, the debtor will need to file under Chapter 13 and buy out the excess equity and pay that money to his creditors.

Another example of when a below-median income debtor will need to file under Chapter 13 even if he qualifies for Chapter 7 relief is if he is behind on his mortgage or vehicle loan payments. Since secured creditors are protected, the arrearage needs to be caught up prior to filing the Chapter 7 petition, or the arrearage can be caught up over time through a Chapter 13 repayment plan.

These categories of under-median income debtors are only required to commit to a three year repayment plan. By failing the Means Test, above-median income debtors are subject to a five year commitment period and must dedicate all their disposable income to the unsecured creditors, or as much of their disposable income as is needed to repay their debt in full.

The Means Test is not the only test for eligibility for bankruptcy relief. For example, if you filed for and obtained a Chapter 7 discharge within the prior 8 years, you will have to wait until 8 years have passed before you can file again under Chapter 7. If you filed for Chapter 13 bankruptcy relief and obtained a discharge within the last 4 years, you can be eligible for a discharge again under Chapter 13. Even if you are not eligible for another discharge of your debt, you may be able to obtain debt relief by filing Chapter 13 at any time and spreading your payments over five years to catch up on your mortgage, vehicle loan payment and even tax liability to make these payments more manageable. However, if you file in bad faith, or you fail to disclose assets or income or try to mislead the court or, under all the facts and circumstances, the court believes you are acting in bad faith, you may be denied bankruptcy relief. These are all non-Means Test factors affecting eligibility for bankruptcy relief.

REALITY CHECK! Sound legal advice is based on practical experience, understanding your specific situation, and considering creative solutions where possible to make the law work for you. Bankruptcy and bankruptcy relief is far more that simply filing a petition. Effective bankruptcy counseling explores all options and tries to ensure that you are better equipped to avoid facing bankruptcy again in the future.