Chapter 7 Means Test
In October 2005, Congress added the means test to the bankruptcy laws to try to push high income debtors out of Chapter 7 and into Chapter 13.
Filing for bankruptcy often gives debtors significant relief because it allows them to get their lives back on track. Chapter 7 bankruptcy allows debtors to liquidate their assets, wipe out their debts and move on with a clean slate. However, Chapter 7 is only available to some debtors who have a low enough income to pass the bankruptcy means test.
Here is how it works. The first step is for us to determine if your gross taxable income for household family of your size exceeds the median income for family in your area. Even if your spouse is not filing bankruptcy with you, their gross income must be included in the calculation.
Six Month Consideration Period
The six month consideration period is the six calender months that precede your filing date. For example, if your case was filed on January 1st, the months that will be considered are June, July, August, September, October and December. If you have recently received a large bonus at work, this may skew the numbers against you. In contrast, if you have been unemployed for a large part of the six month consideration period, this may skew the numbers in your favor.
Chapter 7 Means Test: Median Income Test
If your gross income is less than the median income for a family of your size, you may be eligible for Chapter 7 bankruptcy. On the other end of the spectrum, if your income is significantly over the median income for a family of your size, you will not be able to file Chapter 7 but may be able to file a chapter 13 bankruptcy. The more money you make results in a higher required Chapter 13 payment.
For over-median debtors, there are some deductions that we can take which will lower the required Chapter 13 payment. For example, we can deduct the average amount of state and federal taxes that you have paid during the six month consideration period. Also, we can deduct the six month average of the amount of money that you have donated to a charitable organization such as a tithe. If you have a car loan, this will add another deduction. Child support and daycare expenses can also be deducted.
If you are over median and file chapter 13, your case will run for a period of sixty months.
Chapter 7 Means Test Calculation
1. Monthly Income
The first step in the Chapter 7 means test calculation is determining your current monthly income (“CMI”). This is calculated by adding up all of your income for the past six months (the “look back period”) and dividing that number by 12 to determine your annual income.
Sources of income include:
- All wages and tips, including bonuses and commissions
- Investment income from stocks and bonds
- Income from rental property
- Alimony or spousal support, or other regular support, such as monthly money from your parents, siblings, or children to assist with your expenses
- Retirement or pension funds
- Unemployment benefits
- State disability payments
The CMI calculation specifically excludes social security benefits and income received if you were a victim of a war crime or domestic or international terrorism.
Once you have calculated your income, the next step is to compare it to the state’s median income for your family size.
In Georgia, the current median family income is as follows:
- Single person household: $46,810
- Two-person household: $61,794
- Three-person household: $70,863
- Four-person household $80,510
If your income falls below the median line, then you pass the means test and are eligible for Chapter 7 bankruptcy. If your income is above the state median, you may still qualify, but you will need to perform additional calculations to show that you qualify.
2. Disposable Income vs. Expenses
If your income is above the median for your state, the next step is to analyze your disposable income compared to your bills.
To calculate your disposable income, you will add up all of your household expenses and subtract this number from your actual income. The remainder is your disposable income.
In other words: current monthly income - monthly expenses = monthly disposable income
Household expenses include:
- Housing expenses, such as your rent or your mortgage payment
- Utility expenses
- Involuntary payroll deductions, such as union dues
- Transportation costs, including your monthly car payment, automobile insurance, and money spent on gas
- Court-ordered payments, such as spousal support or child payment
- Child care expenses
- Healthcare expenses, such as insurance or doctor’s bills
The expense calculation is not a free-for-all, so you will not be able to include designer shoes and luxury leather jackets for every day of the week in your household expenses. Instead of inserting your numbers for some of these categories, you will use either a national standard or a local standard to determine what a reasonable number is for each category.
For example, for items such as food and clothing you should look at national numbers. The 2018 IRS national standards for allowable living expenses permit a single person $89 for shoes, clothing, and clothing-related services, such as laundry and dry cleaning. For utilities and housing expenses, you will use local county standards. In Floyd County, for example, a single person’s maximum monthly allowance is $1,222. This division between national and local standards allows debtors to take their area’s standard expenses into consideration when calculating expenses.
Some areas will allow you to input your actual calculations. You will be able to list your current child care expenses, health costs, and taxes or other involuntary payroll deductions on this form. You will also be able to look at your current mortgage and car payments, even if they are above the national or local standard.
Because calculating these types of expenses can be the make-or-break between passing or failing the means test, it is important to be thorough and go through all of your receipts and bills. You may feel like you are cheating the system, but in reality you are taking advantage of laws designed to protect debtors.
Once you have subtracted your household expenses from your current monthly income, you will have your monthly disposable income. You will multiply this number by 60, to determine your five-year disposable income.
If this number hits a certain threshold, as listed on the calculation form, you may not qualify for Chapter 7 bankruptcy. Chapter 7 is designed for low income earners to walk away from their debt, rather than repay it, so the courts need to screen for potential abuse.
There are three thresholds at this time, but these numbers may be adjusted on April 1, 2019.
Currently, if your disposable income is $7,700 or below, there is no potential for abuse and you will pass the Chapter 7 means test.
If your disposable income is between $7,700 and $12,850, you will need to determine if your disposable income is enough to pay 25% or more of your unsecured, nonpriority debt, such as medical or credit card debt. If it is, then the court may convert your application to a Chapter 13 plan if no special circumstances are present.
If your disposable income is above $12,850, there is a presumption of abuse. Even if the number is above this threshold, you may still qualify for Chapter 7 if a special circumstance is present.
3. Special Circumstances
There are a number of special circumstances that may allow you to pass the Chapter 7 means test, even if your disposable income is above the government-set threshold.
These circumstances include:
- Being called to active duty military service
- Having serious medical conditions, such as cancer or another disease
- A sudden job loss, income reduction, or forced retirement
- Recent separation or divorce
- Unexpected events, such as a hurricane or other natural disaster, that brings serious additional expenses to the debtor
Student loans are not currently accounted for in the expenses calculations. This may change in the future, as more and more Americans face mounting student loan debt. Typically, even though they are unsecured, student loans are not dischargeable in bankruptcy. However, some bankruptcy courts will take student loan debt into consideration as special circumstances to allow a filer to qualify for Chapter 7, but others may not.
In general, courts are willing to listen to debtor’s special circumstances, but you will need to be able to explain them and provide significant documentation in order to qualify for Chapter 7 bankruptcy.
4. Court Approval
Even if you pass the Chapter 7 means test, the bankruptcy court will still need to approve your application before you can proceed with your plan. The judge may decide that your disposable income is high enough to pay back enough of your debt that you should be on a Chapter 13 repayment plan instead.
Your bankruptcy attorney will discuss all potential outcomes with you so that you will be in the best position to decide how you want to move forward with your life.
Example Means Test Calculation
Sam lives by himself and feels overwhelmed by medical bills from an emergency appendectomy and credit card debt accumulated while he was recovering from surgery and unable to work. In July, he starts to research if bankruptcy would be a good option for him after his office suddenly closes and he is now unemployed.
Sam’s income for the six month lookback period is:
January: $1,000 - He was able to return to work partially through the month after the surgery.
February: $4,000 - Sam’s regular monthly income is restored.
March: $7,000 - Sam earned a huge commission at his job that month.
Total six-month income: $24,000
Annual income: $48,000
Because Sam’s income is above the Georgia median income of $46,810, he will need to look further into the means test to determine if he is eligible for Chapter 7.
Sam will then look at all his household expenses to determine what his disposable income is. If Sam’s disposable income is less than $7,700, there is no presumption of abuse and he will be able to move forward with his Chapter 7 application with no further explanation needed.
If Sam’s disposable income is more than $12,850, there is a presumption of abuse and he will need to show special circumstances in order to pass the means test. If Sam shows that he lost his job recently and has little hope in the immediate future of gaining employment, he may pass the means test.
What If I Fail the Means Test?
If your income is too high to meet the Chapter 7 means test, you are still eligible to file for Chapter 13 bankruptcy. This division prevents people who are able to pay their debts from walking away from them completely. Under Chapter 13, you will prepare a structured repayment plan, which allows you to pay back most, if not all, of your debt in three or five years.
Filing for Chapter 13 gives you many of the same benefits as Chapter 7, including preventing creditors from taking any actions against you to collect the debt. It will stop all collections lawsuits, harassing phone calls, and wage garnishments, giving you a break in order to get your life back on track.
There are many benefits to filing for Chapter 7 bankruptcy. All debt collection activities must cease during the duration of the bankruptcy, meaning that all harassing phone calls, wage garnishments, and collections lawsuits will stop. Although your unsecured debts, such as credit card and medical debts, will be wiped out, Chapter 7 filers will still need to make payments on secured debts, such as their homes and vehicles if they wish to keep the property.
This article does not provide legal advice or form an attorney-client relationship. If you have questions regarding the Chapter 7 means test or are interested in learning more about Chapter 7 bankruptcy proceedings, contact our office today to set up a consultation.
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