The so called “means test” is a formula that Congress made part of the Bankruptcy Code in 2005. In revising the Bankruptcy Code, Congress decided that too many Debtors were “abusing” bankruptcy by obtaining a discharge of debt that they really could afford to repay.
The purpose of the means test is to provide a method for the Bankruptcy Court to determine which Debtors can repay their unsecured debt (at least in part) in a Chapter 13 case. Debtors who “fail” the means test must either convert their Chapter 7 case to a case under Chapter 13, or pursue non-bankruptcy options. If a Debtor fails the means test, his Chapter 7 bankruptcy case is presumed to be abusive, and the United States Trustee will seek to have that case dismissed or converted to another Chapter under the Code.
The way the test works is as follows: all of the gross income coming into the “household” during the six months before the case is filed is added together. That number is then divided by six to arrive at an arbitrary number that approximates “current monthly income”. Internal Revenue Service statistics are then used to compare that “current monthly income” for the Debtor’s household to the income of households of the same size in the state. If the Debtor’s “current monthly income” is less than “median” income for a household of the same size, Debtor passes the objective part of the test. (“Median income” assumes that all of households in the state of the relevant size are lined up in order from the poorest to the richest. The “median” is the household that stands exactly in the middle of that array, so that half of the households of that size make more money, and half make less.)
If the Debtor’s household is more than median income, the Debtor does not necessarily fail the test. In that case, the lawyer has to continue with the long form of the formula. The formula provides that certain items are to be subtracted from “gross current monthly income” such as taxes, insurance, child support or alimony, and payments made on secured debt like houses and cars. In addition, standard “allowances” are made for housing expenses, utilities, food, clothing, medical expenses, and the like. At the end of the formula, your “disposable income” needs to be zero (or close to it), and if it’s not, you fail the test. If you fail the test, but have “extraordinary circumstances”, there is an opportunity to assert those circumstances (and document them), and then you may “pass” anyway.
The means test is not ordinarily a problem if you are overwhelmed by debt and really can not afford to pay. The test does require that you provide documents about your income such as pay stubs, and it requires that a lawyer make calculations using a computer. You shouldn’t worry about it, and should arrange a careful consultation with an experienced lawyer as part of the process of considering a bankruptcy filing.
Please call us at 770-683-3303 to discuss your particular situation with our lawyers.