The Means Test

What is the Means Test?

In 2005, the Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which made major changes to the Bankruptcy Code. One key addition to the Code was the implementation of the “Means Test” which was intended to prevent high income individuals from filing under Chapter 7, and instead forcing those people into a Chapter 13 repayment plan for 5 years. For people who have below median income for a household of their size in their state, will fairly easily pass the Means Test. For those who have above-median income, the Means Test can get substantially more complicated, and can potentially force someone into a Chapter 13 bankruptcy. This much more complicated “step two” of the Means Test begins with a gross income figure and then allows for certain standardized and actual expenses to be deducted, and disallows certain other actual expenses. If the result shows a disposable income sufficient to pay a certain portion of one’s debt, then you can only file under Chapter 7 if you show that there are “special circumstances” which should be considered.

Although the Means Test was designed to make individuals who have the means to pay back their debt to actually pay back some of their debt, the reality is that the Means Test is extremely flawed. It is a mechanical test that is not based in reality and it often catches people who are in a financial situation where repaying debts is just not feasible or sustainable.

We are Means Test Experts.

How We
Can Help

Navigating the Means Test can be extremely complex and requires an extensive knowledge of the Bankruptcy Code, US Trustee policy positions, local trustee and judge policies and considerations, and case law in order to maximize your chances of passing.

The
Means Test

Step-By-Step

The Means Test can be broken down into two parts:

Part 1 is the above/below-median test which looks at the last 6 months of your income, doubles that, and compares this figure to the median income for your state. If you are below median, you pass the test and can file a Chapter 7 bankruptcy, assuming there are not any other barriers to eligibility. The policy here is that if your income is below a certain point, you should not be expected to make payments to creditors in a Chapter 13If you are above median, then you move along to Part 2.

Part 2 starts with the same calculation of income, and then you start deducting expenses from this with the goal of getting as close to zero or negative. These expenses can be broken down into a few categories:

Standardized expenses: Food, utilities, housekeeping, and other expenses that are universally applicable. The amounts of these expenses will vary depending on your household size.

Actual allowable expenses: These include expenses that are not universally applicable but that the debtor does not have complete control of. Common actual allowable expenses include things like healthcare expenses, mandatory retirement contributions. childcare, child or spousal support, and charitable contributions.

The amount left over after these deductions is your “disposable income”. If this is not sufficient to pay a meaningful dividend to creditors (a specific figure that is periodically adjusted), then you have passed Part 2 of the Means Test and you can file a Chapter 7 bankruptcy. If the amount of disposable income is more than this, then a “presumption of abuse” arises. In this scenario, you can either file a Chapter 13 or you can file a Chapter 7 and try to rebut the presumption of abuse.