Bankruptcy and the Means Test

The Means Test is a purely mathematical calculation required by the bankruptcy court for the purpose of determining if an individual debtor (or married couple) has too much disposable income to qualify for a chapter 7 discharge.

There is one notable exception to this test. A debtor whose debt is primarily (over 50% of the total amount of the debt) non consumer, i.e. business, does not need to take the Means Test. This means that a majority business debtor is the only kind of debtor who can show the ability to repay creditors each month but still qualify for a Chapter 7 discharge.

The test is a combination of a look back of the debtor(s) income and a look ahead of the debtor(s) expenses. The debtor(s) previous six months of income are used to determine the debtor current monthly income, and then the debtor(s) ongoing and future expenses are subtracted to get a final determination of whether the debtor has any disposable income.

Should the debtor fail the means test and thus not qualify for a Chapter 7 discharge, the debtor will most likely file a Chapter 13 should he/she still wish to file bankruptcy or perhaps wait out the filing until the means test can be passed.

While the test is not determinative and only creates the presumption of abuse, should the debtor(s) fail, it is not easy to beat that presumption. Similarly, while a passing result on the means test indicates there is no presumption of abuse by the debtor(s), that presumption can still be rebutted. In fact, the US Trustee office occasionally files motions to dismiss and/or deposes debtor(s) when it feels as if there might be an abuse, despite the paper results of the means test. It is important to note that the US Trustee motion to dismiss the Chapter 7 proceeding should it occur and be ordered by the judge is not a motion to force a debtor into a Chapter 13, as a debtor cannot be forced into a chapter 13 filing. If the debtor did not want to do a Chapter 13, the debtor case would be dismissed without a Chapter 7 discharge.

The means test has two prongs. Should the debtor pass the first prong, the second part is irrelevant and the debtor Chapter 7 filing has no presumption of abuse.

The first prong is simply a calculation of whether the debtor is below median income. Should the debtor be below median income for his/her county, then there is no presumption of abuse. However, the determination is based upon not exclusively the debtor(s) income, but on household size income for the debtor(s). So if the debtor makes limited money, but has a non-filing spouse who makes good money and contributes enough money to the debtor, the debtor might not qualify. Should the debtor be above median income, then all is not lost, and it is on to the second prong of the test.

The second prong of the test is essentially a look to see if an above median income debtor has an excusable reason to be determined non abusive. This prong allows deductions for secured debts (typically a car or home mortgage payment), taxes, charitable contributions, life insurance, health insurance, disability insurance, and children education expenses, among other things.

Some things that many presume to be allowable deductions are not allowed, like a 401k contribution, 401k loan or student loan payment. After all the deductions are subtracted from the current monthly income, if the debtor has more than $182.50 positive monthly disposable income, the debtor Chapter 7 is abusive. If the debtor has less than $110 positive monthly disposable income, the debtor Chapter 7 is not abusive. Anything in between, and the answer is maybe, since it comes down to a calculation based on the debtor total amount of unsecured debt.