What is this “Means” Test I Have to Pass?

The means test is used by the courts to determine eligibility for Title 11 of the United States Code Chapter 7, or payments in Chapter 13 bankruptcy. It was designed to prevent debtors who have sufficient financial means to pay a portion of their debts from liquidating them entirely in a chapter 7 bankruptcy.

During the Great Depression, the test was used to screen applicants for such programs as Home Relief in the United States, and starting in the 1960s, for benefits such as those provided by the Food Stamp Program. In 2005, the United States bankruptcy laws changed by adding a means test to purportedly prevent wealthy debtors from filing for Chapter 7 Bankruptcy. This 2005 BAPCPA change is found in 11 U.S.C. § 707(b).

If you are in the military or have a majority of non-consumer debt you are exempt from the means test income guidelines. Non-consumer debts are mainly those incurred for business or profit purposes, tax debt and tort debt.

Is Your Income Less Than the Median?

Debtors whose income is below the state’s median income pass the means test. To check your median income you must first determine your household size. Gross wages, business income, pension, family support, unemployment, regular gifts and other income is included. Social security payments are not included.

The median California incomes as of March 2012 are:

1 person – $47,683

2 persons – $61,539

3 persons – $66,050

4 persons – $74,806

5 persons or more – Add $7,500 for each person in excess of 4.

If your income is below the median you go no farther with the form or the calculations. STOP you are done. You can file for chapter 7 and do not need to complete the rest of the form.

What If My Income is Over the Median?

In Marin County we often see the situation where the income exceeds the median but there is not enough left to pay the creditors. In this case the long form of the means tests must be completed. The long form factors in expenses like mortgage payments, payments for taxes, insurance, costs of education, healthcare costs and insurance costs. Most people who need help find that they pass the means test.

If you pass the means test it means that you can file a chapter 7 bankruptcy. Just because you can file under chapter 7 doesn’t mean it is the best chapter for you to file under. If you are trying to catch up with mortgage payments or have unsecured liens on your property a chapter 13 would likely benefit you more.

Please see the following for more M posts:

Image Credit: Leo Reynolds

 

I is for Income

What income do I need to disclose in my bankruptcy?

All of it gets listed one way or another. Your wages, commissions, bonuses, regular contributions to the household by a family member or housemate, retirement and pension income, workers compensation and unemployment. Loans don’t count and one-time contributions also don’t count.

Means Test Income

For purposes of the means test, the U.S. Bankruptcy Code defines current monthly income as including: “any amount paid by any entity other than the debtor (or in a joint case the debtor and the debtor’s spouse), on a regular basis for the household expenses of the debtor or the debtor’s dependents (and in a joint case the debtor’s spouse if not otherwise a dependent)…” Benefits received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism or domestic terrorism on account of their status as victims of such terrorism are excluded from the means test.

The means test looks back at the past six months on income as defined above. If you file a bankruptcy in January, the past six-month (or look back) period is July through December. It is this six-month period that will determine what your average annual income is. You must compare your average annual income based on the past six-month period to the median average for your state to see if you qualify to file a Chapter 7 bankruptcy. If your income is too high to file a Chapter 7 you may still qualify to file a Chapter 13.

Income on Schedules and the Statement of Financial Affairs (SOFA)

There is a Schedule I for Income where you list your monthly income including Social Security payments and other income that might have been excluded form the means test look back income. This schedule will be compared with your expenses that are listed on another schedule. One of the bankruptcy complexities is that income and financial information is listed in more than one way within the same bankruptcy case.

There is also a question on the SOFA that asks for the past several years of income broken down by wages and other types of income. Your answers to these questions can come form your income tax returns.

For another slant see Jay Fleischman’s I is for Income. Also see Cathy Moran’s I is for IRS and Christopher McAvoy, I is for Income Tax Refunds.

More I’s:

Image credit: Leo Reynolds

 

C is for Chapter 7

C is for Chapter 7

Chapter 7 is a complete liquidation of your debt through a process in Federal Bankruptcy Court. If you cannot afford to meet your monthly living expenses and pay your debts, you may be able to liquidate your debt. Not everyone will qualify to file Chapter 7 under the Bankruptcy Code’s “means test” and certain types of debt cannot be discharged or wiped out (such as most federally guaranteed student loans, many taxes and any outstanding family support obligations).

Means Test

At its simplest, the means test is based on the average California median income according to family size. The median income levels recently dropped to reflect the state of the economy. For a single person it is $47,683 a year and it goes up as family size increases. See the United States Department of Justice Census Bureau Median Family Income.

There is a long form of the means test that factors in secured debt payments such as your mortgage and other necessary expenses like medical bills and insurance. This is a complex form best undertaken by a local knowledgeable bankruptcy professional. Completion of the long form will let you know if you pass the means test even though you have above median income.

Required Courses

You will also be required to take two courses from California approved credit counseling providers. The first course must be completed before you can file (within 180 days) and the second course is completed after filing and before you can obtain a discharge. I think of theses courses as the ticket in and the ticket out of the bankruptcy proceeding.

Chapter 7

After you file for bankruptcy, most of your assets become property of the estate and subject to sale and distribution to the creditors. However, in most consumer cases all the assets are exempt and are not available for liquidation.

The debt liquidation is called a discharge. You cannot get a Chapter 7 discharge of your debts more often than every eight years. Only individuals obtain a discharge of their debts. If a corporation or partnership files for Chapter 7 relief the entity is dissolved.

The entire process of a Chapter 7 from beginning to end is generally four to six months. If there are any non-exempt assets to be sold it will take at least several months longer

A Chapter 7 will stay on your credit report for 10 years from the date of filing. The impact on credit is generally minimal because most people who need to file a bankruptcy already have low credit scores. Also there are ways to rebuild credit without going into debt after you have filed

Check out consumer protection attorney Jay Fleischman who thinks C is for Creditor. He provides a thorough explanation of who your creditors are.

More Bankruptcy C’s:

Can I still file for bankruptcy if I’m working? Can I file for a chapter 7 bankruptcy if I’m working? Yes.

 You may have been out of work for a period of time or have large medical bills that are making it impossible to get caught up financially.

How much you earn and what types of debt you have will determine what bankruptcy chapter you file but most of the time people who need the help of the bankruptcy court qualify to file. Simply put, if you earn less than the median income for your state you will pass the means test and may file a chapter 7 bankruptcy.

The means test is based on the median state income which you can find on the United States Department of Justice website. It means that if you earn more than the median income amount in your state the presumption of abuse is raised if you file a chapter 7 bankruptcy. If a presumption of abuse is found you may not be able to get a discharge of your debts.

If you earn more than the median income, you may still qualify for a chapter 7 depending on the type of obligations you have to pay each month. In this case you will need to calculate a long form of the means test. If after entering secured debts, taxes paid, medical expenses and other qualifying expenses your income is within guidelines then you can file for a chapter 7 bankruptcy.

Even if you qualify to file a chapter 7 there may be reasons why it would be in your best interests to file a chapter 13. If you have an underwater house, owe incomes taxes or obligations arising from a marital dissolution filing a chapter 13 bankruptcy might be to your benefit. It is a complex, fact specific determination, so consult with a knowledgeable local bankruptcy attorney to determine the best strategy to meet your goals.