June 30, 2010 Leave a comment
The means test is a provision added to the 2005 Bankruptcy Reform Bill. Many clients believe that it is designed to throw them out of bankruptcy. It is not. It is merely designed to throw you out of a Chapter 7 and into a Chapter 13 bankruptcy because you supposedly have the “means” to pay all or part of your debts back in a chapter 13. You would therefore not be eligible for a chapter 7. You are not thrown out of Bankruptcy though as another chapter is available to you. If you don’t pass the test because you make too much money and you filed anyway they will allow you to convert the case to a chapter 13. Check back for my next blog on the differences between a chapter 7 and 13
The means test is a test where you enter your gross monthly average household income for the last six months and you see if you make more money than the average person in your county. At the time of writing this, the yearly averages for San Diego county are: $47,969 for 1 person in the household, $64,647 for 2 people, $70,638 for 3, and $79,194 for 4. You get full credit for each child in the house and you are allowed to make extra money for each one.
If you make more than these allowed amounts you go into the means test. You then deduct all of the allowable expenses. First there are your taxes, then medical insurance, and union dues that are allowed to be deducted from the total. You then get “standard” deductions for medical, housing, living and car expenses. Many people will lose out here because their actual expenses for these items exceeds what the means test allows and then you will often not be allowed to take them even if you actually do spend that much money on those items.
You will be able to take all of your secured creditor payments for mortgages, and cars, and even thing like jewelry, electronics, and furniture. Since you are obligated to make those payments (or lose the item you financed) you can get full deductions for these in the means test. Then there are additional categories for allowed deductions for things like childcare, charity, care of elderly, certain education expenses, among others.
After all of that is deducted and calculated you see if you pass the means test. I do it all on software that calculates it for me and tells me if you pass or not. This test should be done first thing in the Bankruptcy case if there is a situation where a person or a family earns a fairly high income. The means test looks back six months to see what your average income was in that period so if you just lost your job you may have to wait to file so that you 6 month average income will decline.
The means test is a somewhat complicated test and it is best to have an attorney do this for you and advise you of options if you fail it. If you are going to get a raise though you might want to file before your income increases so you can get you chapter 7 discharge.
Don’t despair though as most Bankruptcy lawyers are used to dealing with the means test and they (and good software) can guide you through it.
I am a bankruptcy lawyer in San Diego.
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