When Congress enacted the Bankruptcy Reform Act in 2005, they made some sweeping changes. One of the most fundamental changes they made was the creation of the means test. The means test is completed in both a Chapter 13 bankruptcy and Chapter 7 Bankruptcy.
In a Chapter 13 Bankruptcy, the means test is referred to as Form 22C. In a Chapter 7 Bankruptcy, the means test is referred to as Form 22A.
The Chapter 7 Means Test
For 95% of consumer debtors, the means test must be “passed” in order to qualify for a chapter 7 bankruptcy. In order to determine if you pass the means test, you must show you are either below median income, or that with your deductions, there is no disposable income left over to pay your creditors.
The form takes all of your income for the last six months and then takes your expenses and will end up with a final number, which is your “Total Current Monthly Income.” That number is then compared to the median income for your household size. The median income is taken from the IRS for your geographical area. In order to pass the means test, that number needs to be less than the IRS median income.
A means test is like a tax return, there are certain deductions that you can take to help lower your total current monthly income and you want to make sure you use every deduction possible.
What if I don’t pass the means test?
First, you need to make sure you actual failed the test. Remember, there are lots of deductions that you can take. In addition, certain forms of income don’t count against you (such as social security income), so make sure you have a “qualified” attorney verify the means test. Our office can conduct a free means test analysis at your initial meeting to make sure you qualify.
Second, if you have verified and you did actually fail the test, all is not lost. You still may qualify for a chapter 7.
3 WAYS You Can Qualify for a Chapter 7 Even If You Failed The Means Test:
1. If more than 50% of your debt, is “business” related, you will not be required to go through the means test. So even if you would fail, because your debts are primarily business, you can bypass the means test entirely.
2. If there has been a change in circumstances, such as a recent drop in income or an anomaly in your past six months income, you still may be able to file a chapter 7 even though you failed the means test.
3. Veteran’s Declaration Exemption from Means Test. If you qualify for the Veterans Declaration, then you are not required to go through the means test. In order to qualify for this you must establish that you are:
- Disabled Veteran
- Whose indebtedness occurred during a period in which you were on active duty OR
- While you were performing a homeland defense activity
Chapter 13 Means Test
The Chapter 13 Means Test is different in that you don’t “pass” or “fail” it. Rather, the Chapter 13 means test is used to determine how much of your unsecured creditors you should pay.
There are a few differences though. In the chapter 13 means test, you are able to take certain deductions that you do not get to take in the Chapter 7. This means you could have a scenario where you don’t qualify for a chapter 7 but in a chapter 13, you would not be required to pay back any of your unsecured creditors.
The reason the above could happen is because the chapter 13 means test allows you to deduct your 401(k) and retirement payments out of your paycheck. In addition, the Chapter 13 means test allows you to remove child support income from the equation.
At the end of the day, you need to find an attorney who is “legally aggressive” on the means test. This simply means being creative about your deductions and making sure that you take 100% of the deductions that are available to you. A great accountant can save you thousands, a great bankruptcy attorney can do the same!