Stepping Over the “Means Test” Hurdle Without Breaking Your Stride

Are you among the large majority of people whose income easily qualifies them for Chapter 7 “straight bankruptcy”? You can find out right here and now.

As you’ve likely heard, a few years ago Congress passed a major set of changes to the bankruptcy laws intended to make it harder for some people to file Chapter 7.  The idea was that those who have the means to pay a meaningful amount of their debt to their creditors in a three-to-five-year Chapter 13 payment plan ought to do so. So they shouldn’t be able to just write off all their debts in a Chapter 7 case. At least that’s the theory behind the means test.

In practice, for many people it’s quite an easy hurdle to step right over.  Most people who want to file a straight bankruptcy can still do so.

The means test is truly an odd one. It has two parts. The income part—the one I’m addressing here today—is relatively easy to figure out.

But the second part, involving living expenses, is one of the most complicated formulas imaginable. This law was worded so poorly that more than six years after it became effective there’s still a lot of debate about how it’s supposed to work. Fortunately, most people don’t need to get to that part of the test, and we won’t here.

That’s because if you pass the income part of the test, you can totally skip the expenses part.

So, the income part of the means test compares your income to a published “median income” for a household of your size in your state. If your income is no more than that median, then right away you’ve passed the test—you get to file a Chapter 7 case.

But even this easy part of the test has its quirkiness.

1. It is NOT based on your taxable income for the previous calendar year, or anything that simple. Instead it is based on the precise amount of income you received during the six full calendar months before your case is filed. So, for example, if your case is filed on January 25, 2012, we look at every dollar you received during the six-month period from July 1 through December 31, 2011. Then take that six-month total and divide it by six to come up with a monthly average.

2.The income included for this purpose is not just your “taxable income,” but rather every bit of income you’ve gotten from all sources during that period of time, including irregular ones like child and spousal support payments, insurance settlements, unemployment benefits, and bonuses. The exception: exclude all social security income.

Then multiply your six-month average monthly income by 12 to come up with your annual income. The last step is to compare that amount to the median income for your state and your size of family. You can find that median income in the table that you can access through this website. (This median income information gets updated every few months, so make sure you’re using the current table.)

If your income, as calculated in this precise way, is no more than the median income applicable to your state and family size, then you can file a Chapter 7 case. Congratulations—you’ve cleared the means test hurdle!

If your income is MORE than the applicable median amount, don’t despair. You may well still be able to file a Chapter 7 case. More on that in my next blog.