The so called \u201cmeans test\u201d 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 \u201cabusing\u201d bankruptcy by obtaining a discharge of debt that they really could afford to repay.<\/p>\n
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 \u201cfail\u201d 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.<\/p>\n
The way the test works is as follows: all of the gross income coming into the \u201chousehold\u201d 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 \u201ccurrent monthly income\u201d. Internal Revenue Service statistics are then used to compare that \u201ccurrent monthly income\u201d for the Debtor\u2019s household to the income of households of the same size in the state. If the Debtor\u2019s \u201ccurrent monthly income\u201d is less than \u201cmedian\u201d income for a household of the same size, Debtor passes the objective part of the test. (\u201cMedian income\u201d assumes that all of households in the state of the relevant size are lined up in order from the poorest to the richest. The \u201cmedian\u201d 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.)<\/p>\n
If the Debtor\u2019s 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 \u201cgross current monthly income\u201d such as taxes, insurance, child support or alimony, and payments made on secured debt like houses and cars. In addition, standard \u201callowances\u201d are made for housing expenses, utilities, food, clothing, medical expenses, and the like. At the end of the formula, your \u201cdisposable income\u201d needs to be zero (or close to it), and if it\u2019s not, you fail the test. If you fail the test, but have \u201cextraordinary circumstances\u201d, there is an opportunity to assert those circumstances (and document them), and then you may \u201cpass\u201d anyway.<\/p>\n
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\u2019t worry about it, and should arrange a careful consultation with an experienced lawyer as part of the process of considering a bankruptcy filing.<\/p>\n
Please call us at 770-683-3303 to discuss your particular situation with our lawyers.
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