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The Means Test

04_36_3_web (25K)      Most people think of bankruptcy in terms of Chapter 7, where unsecured debts are generally discharged completely and the debtor gets a fresh start. The bankruptcy code provides for two types of bankruptcy actions generally available to individuals. Chapter 13 bankruptcies are different. In Chapter 13, the debtor must pay back a portion of the debt over a 3-5 year period, with 5 years being the norm under the new bankruptcy law.

     The means test is used by the courts to determine eligibility for Chapter 7 or Chapter 13 bankruptcy. To apply the means test, courts look at the debtor's average income for the 6 months prior to filing and compare it to the median income for that state. For example, in Michigan the Census Bureau median family income by family size is as follows:

For Cases Filed Between October 1, 2008, and March 14, 2009
Family Size
  • Individual - $43,050.
  • Two people - $51,594.
  • Three people - $60,997.
  • Four people - $73,490.
  • add $6,900 for each person over four.
     The median income changes periodically based on numerous cost of living factors. The U.S. Department of Justice Trustee Program maintains a current chart for each State and is available at this link: U.S. Trustee State Median Chart.

      If the debtor's income is below the median, then the means test is satisfied and Chapter 7 remains open as an option. If the debtor's income is above the median, the remaining parts of the means test come into play.

     The next step in the means test is to take the monthly income, less allowances and permitted living expenses, and multiply that number 60 months to arrive at adjusted income. This number is your "disposable income" or the amount you can pay toward your debts. If you can pay at least $10,000 ($167 per month), you can not file for Chapter 7. If you can pay at least $6,000 ($100 per month) and that is at least 25% of what you currently owe your unsecured creditors, you can not file for Chapter 7. If your disposable income is less than $100 per month, you can file for Chapter 7.
Expenses and Allowances
In using the means test to calculate disposable income, the bankruptcy law sets out several categories of permissible monthly expenses.
  • Food, clothing and other items. These vary according to household size and gross monthly income.
  • Housing and Utilities. The allowance for housing and utilities varies according to household size and geographical location.
  • Transportation. These standards are regional, and include cost of owning and operating a car, or public transportation costs for those with no car.
bankruptcy (24K)      These expenses and allowances are calculated by referring to a set of allowances established by the Internal Revenue Service. They are not reduced if a debtor's actual expenditures are less than the standard. In addition, to these standard deductions, you can also deduct the full amount of certain actual expenses such as mortgage and vehicle loan payments. reasonable and necessary spending to care for an elderly, chronically ill, or disabled member of the debtor's immediate family, actual education expenses up to $1,500 per year for each minor dependent child, reasonably necessary expenditures for health insurance, home energy costs in excess of the IRS housing and utility standards, with justification and normal monthly payments on priority claims (i.e., child support, student loans, alimony, etc.).

     The next page contains a flow chart of the decison making process included in the Bankruptcy Means Test. If you apply this chart to your circumstances and arrive at a STOP sign, the test is satisfied.
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     A small number of possible bankruptcy filers are affected by the Chapter 7 means test. For the rest, bankruptcy works virtually the same as it always did, except that there are additional steps required. Even the relatively few people who are barred by the Chapter 7 means test can generally still choose to file under Chapter 13.

     The "means test" can be complicated and intimidating. However you should not let it discourage you from considering bankruptcy. We can assess your situation specifically. If you're considering bankruptcy, get direct answers and assistance by scheduling a free consultation with us.

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