A prospective client called me last week. He was convinced that he needs to file for bankruptcy. He was also convinced that due to his monthly income, he would not be able to “pass” the bankruptcy means test.
The means test, found on Bankruptcy Form B-22, is required by 11 U.S.C. §707(b). Despite the name, the means test isn’t really a pass or fail type of exam. It is more of a measuring stick that determines which chapter of bankruptcy is appropriate for your particular situation.
The means test is largely guided by the median income figures for your state. If the current monthly income for a family of your size is lower than the median income for a household of your size in your state, then you are one step closer to being able to file a chapter 7 as opposed to a chapter 13.
If your current monthly income is higher than your state median, then things are a lot more complicated. In this case, you have to see whether or not you have enough disposable income after paying your allowed monthly expenses to pay at least a portion of your unsecured debt like credit cards.
I can totally understand why the prospective client was worried. If you search Google.com for “bankruptcy means test,” thousands of sites pop up offering tons of overwhelming information. For a more detailed article, check out Craig Andresen’s article discussing the issue here.
A lot of people try to approach the means test like a “do it yourself” home quiz. I’ve actually seen a number of posts that promote a “try this at home” approach for people who are considering bankruptcy.
The means test examines your income and expenses, as they would look three to five years after the bankruptcy filing. The purpose of the means test is to see if you might have a surplus that would allow you to make some sort of payment to your creditors.
Note the two elements there: Income AND Expenses. The means test takes into account the size of your household and the number of allowances your household is allowed to take. It looks at all manner of expenses including: health expenses and costs associated with transportation (i.e. car payments, housing expenses, education expenses for your kids, etc.).
These expenses represent deductions in your monthly disposable income and can make a key difference in your means test outcomes.
The deductions one can take on the means test are very specific and technical. While you don’t have to be a rocket scientist to figure it out – most bankruptcy attorneys spend an enormous amount of time in calculating the means test. This is also why filing for bankruptcy on your own can lead to painful outcomes.
If you think bankruptcy may be right for you – don’t fear the means test. Work closely with your attorney so that you can properly analyze your financial situation and choose the bankruptcy chapter that is right for you. Be sure to disclose ALL of the input and ALL of the expenditures that your family makes. Being upfront with your bankruptcy attorney can really help make the means test more of a friend than a foe.
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