Everything You Need to Know About the Means Test

The Means Test is in place because it is your way to prove to the government that you really do not have the means to pay all of your debts, and that your only option is filing for Chapter 7 bankruptcy. The Means Test is also used when filing Chapter 13, to make sure that your repayment plan is realistic: that your income is sufficient and that you will have the means to make the repayments that your plan entails.

Even if you pass the Means Test and qualify for Chapter 7, the courts do have the right to dismiss your petition because of the good faith requirement. If your income is high enough that your budget could be adjusted to be able to pay a portion of your debts, the courts might rule that you are not acting in good faith, and disqualify you from filing Chapter 7.

There are strict rules about what qualifies as income and what does not, how to calculate income if you are married, as well as which expenses are considered necessary. Some debtors are exempt from having to take the Means Test at all, and are automatically qualified to file Chapter 7. So read on, to make sure you understand which parts of the Means Test apply to you, and which information to use.

Who is exempt from having to pass the Means Test?

If most of your debts are business debts, or if you are or have been in military service, you may be exempt from having to pass the Means Test at all, and may qualify for filing Chapter 7 - even if your income is above the state median. If you think you qualify to be exempt from having to take the Means Test, download Form 22A-1 Supp from www.uscourts.gov.

If you meet the conditions in it, go back to Form 22A-1. All you need to do is check the appropriate box on the first page of the form, indicating that you are exempt from having to pass the Means Test, and the sign the bottom of that form. You do not have to fill anything more out on Form 22A-1, just make sure you attach Form 22A-1 Supp to it when you submit your petition.

Business debt

Debts can be divided into two classes: consumer debt and business debt. Consumer debt is money owed by an individual, mainly for personal, family or household purposes. Business debt is money owed as a result of running a business. Business debt may include money owing for rent on your office space or retail space, or for products used or sold by your business, or for utility bills or phone bills, or for business vehicle loans, business taxes, and any other expenses directly related to the running of your business. In most cases, mortgages on investment properties or properties purchased for the business also count as business debts.

If most (more than 50%) of your debts are business debts rather than consumer debts, you are not presumed to be abusing the bankruptcy system, and you are therefore exempt from having to take the Means Test: you automatically qualify for filing Chapter 7.

Military service provisions

You may also be exempt from having to take the Means Test and qualify for filing Chapter 7 as a result of military service. This exemption applies to servicemembers who:

  • are disabled veterans who incurred most of their debts either while on active duty or while performing homeland defense activity, or
  • who started active duty any time after September 11 2001, who have been on active duty for at least 90 days, and who are still on active duty, or
  • who started active duty any time after September 11 2001, who have been on active duty for at least 90 days, and who were released from active duty fewer than 540 days before filing bankruptcy, or
  • who have been performing a homeland defense activity for at least 90 days and are still performing homeland defense activity, or
  • who performed a homeland defense activity that lasted at least 90 days, and which terminated fewer than 540 days before filing bankruptcy.

The two parts of the Means Test

The Means Test is in two parts. The first part of the Means Test calculates your monthly income, and compares it to your state’s median. If your income is below your appropriate state’s median (adjusting for number of wage-earners and number of dependents), you automatically qualify to file Chapter 7, and do not have to proceed any further.

If your income is above the appropriate state median, then you still may qualify to file Chapter 7 - you just have to do a bit more work to prove to the court that you do not have the means to pay. This second part of the Means Test involves accounting for not only your income, but also your monthly expenses, to show that your cash flow is not high enough to cover paying off your debts.

Means Test part 1: Current monthly income

To qualify for Chapter 7, your Current Monthly Income (CMI) should be under the median income for your state. The form you use to do figure this out is the Means Test Form 22A-1. You can find the most recent version of that form on the U.S. Court’s website www.uscourts.gov.

To determine whether you qualify in this way, you must look up what the current median income for your state is. Your attorney will be able to provide you with this information, or you should be able to find this information online.

Then, calculate what your average monthly income has been, over the most recent six months.

“Income” includes almost everything you have received and that would normally be reported on your income tax form (wages, salary, overtime, bonuses, tips, as well as interest, dividends, rental income, child or spousal support, etc.). However, some proceeds, such as Social Security benefits, proceeds from the sale of items such as your car or from a garage sale, or proceeds from loans, do not have to be included as “income.” We explain how to calculate your Current Monthly Income below.

If your average monthly income is less than the state median, you are automatically eligible for Chapter 7. Note: if your income has dropped recently, for example you were laid off from your job last month, you may not be eligible to file Chapter 7 right now. However, it may be to your advantage to wait a few more months, so that your average income over the six-month period will be low enough to file Chapter 7, than to file Chapter 13 right away.

Means Test part 2: Monthly disposable income

If your income is too high to qualify you automatically for Chapter 7, you may still be able to qualify through the  second step of the Means Test. This requires filling out Form 22A-2.

The Means Test calculates your monthly disposable income. Its rationale is based upon the presumption of abuse: it determines whether a debtor should have the ability to pay their debts rather than try to have them discharged through bankruptcy.

The Means Test takes your average monthly income, which you calculated above, and subtracts the expenses that are considered to be necessary living expenses. You may use your own actual expenses or, in some cases, you may use state averages for expenses such as food, clothing and housekeeping costs. You may also subtract expenses such as costs for health care, child support, childcare, as well as any monthly amounts that you expect you will pay to your secured creditors over the next five years (such as your car payments and your mortgage) or your rent and some transportation costs.

The expenses listed above are examples, but this is not a complete list. You should work with your attorney to make sure you include every possible eligible expense. Then you subtract all of your monthly expenses from your monthly income, to see how much you have left over as “disposable income.”

If you have less than $125 of disposable income each month, then you “fail” the Means Test in that you don’t have the means to pay, and you qualify for Chapter 7. If you have more than $207 of disposable income, then you “pass” the Means Test because you have enough money to pay towards your debts, and must file under Chapter 13. If your disposable income is between $125 and $207 (and note that these figures are current in 2015, and due to be revised in 2016) then a further test will compare your total disposable income to your unsecured debt: if your disposable income is sufficient to pay at least 25% of your unsecured debt, then you do not pass the Means Test.

Calculating your “Current Monthly Income”

The phrase “current monthly income” (or CMI) is a bit misleading, because your CMI is actually calculated by what is called the “look back period,” which is your average income over the past six months. If your income has been cut in the last few months, perhaps because of a job loss or reduced hours, and you are worried about whether you will qualify for Chapter 7, it may be worth waiting a few months before your file, when that average income is lower.

To calculate you CMI, add up all of your income you’ve received over the past six months, then divide that total by six.

What is included in CMI?

Nearly all of the income you receive counts as CMI, regardless of whether it is taxed or not. Following are examples of income that you must report (but please note, this is not an exhaustive list):

  • earned income, including salary, wages, bonuses, overtime, commissions and tips
  • any net income from self-employment or running a business or rental property
  • investment income such as interest, dividends, royalties, annuity payments
  • pension or retirement income
  • unemployment compensation, workers’ compensation insurance payments, state disability insurance
  • child support or spousal support

There is very little income you receive that you can except from including in your CMI. The few exceptions are:

  • payments received under the Social Security Act
  • payments to victims of war crimes or crimes against humanity
  • payments to victims of domestic or international terrorism.

If your income is very irregular, and you received a larger-than-average payment in the preceding six months, you may be able to argue to your court that this was an exceptional payment, and not representative of your average income. Examples might include receiving a large real estate commission, or a one-time bonus. You also might be able to exclude income that you received in that six-month period if it was derived or earned from work completed in an early period. A good bankruptcy attorney can advise you here and argue your case.

Marital status

How you calculate your CMI also depends upon your marital status and whether you are filing jointly with your spouse or not. This is explained on the second page of Form 22A-1, which asks for both your own and your spouse’s income.

If you are not married, or if you are married but filing with the declaration of separate households, you only have to provide your own income. Declaration of separate households means that you and your spouse are either legally separated, or are living apart (and not just living apart in order to avoid the requirements of the Bankruptcy Code).

If you are married, you have two options. You can either file bankruptcy on your own, or you can file jointly with your partner. Either way, you will also have to provide your spouse’s income on Form 22A-1.

What is your state’s median?

Once you have calculated your own CMI, you must compare it with the median income for your state. Note that the median income limits are adjusted according to whether you are an individual or a couple, and according to whether or not you have dependents. For example, it is more expensive to run a household with a family of six than it is a household of one or two people, so each state will calculate median incomes for a range of household sizes.

Be sure to pick the median income threshold that is appropriate to your situation. Your bankruptcy attorney should be able to provide you with the current median income figures for your state - or you can go online to www.justice.gov/ust and search the terms  “state median income.”

Calculating household size

The next step is determining who qualifies as members of your household. There are no strict rules here, and different courts in different jurisdictions may use different criteria to determine who is a member of your household.

In general, your spouse and your dependent children who live with you will all qualify as members of your household. However, some courts will also include children or stepchildren who are not dependents on your tax return, while others will not count anyone who is not a dependent of the debtor for tax purposes.

In the cases of children who live with you part-time, such as in the case of joint custody, or children who are living away for most of the year because they are at college, the courts will likely count them as members of your household if you pay substantial expenses to support them.

It’s important to count all of the members of your household, because the median income figure you use to compare your own CMI with is higher for larger families.

Declaration of special circumstances

In some cases, even if you do not pass the Means Test, you may be able to convince the court to allow you to proceed with Chapter 7 because of “special circumstances” which led to your financial trouble. Examples of special circumstances would be if you recently lost your job, or if you or a family member was seriously ill, causing you to incur high medical bills.

Normally, if you do not pass the Means Test, the court will make a motion either to dismiss your Chapter 7 case, or to convert it to Chapter 13. If you want to proceed with Chapter 7, you must demonstrate to the court what your special circumstance is, by providing documentation of the unusual expense or loss of income, and accounting for why that change was beyond your control.

Read on for our next article in this series: Keeping Property: How to Make the Best of Your Exemptions