Bankruptcy: Means Test
and how to pass it if you need to
The bankruptcy means test continues to confuse both consumers and attorneys. The bankruptcy means test was “supposed” to determine if you qualify for chapter or if you only qualify for chapter 13 bankruptcy. It does neither, in my opinion, very well. There are many gray areas and ways to “legally get around” the bankruptcy means test.
Most come here to see if they can file a chapter 7.
The means test is supposed to tell you if you can file chapter 7, or, if you have to file chapter 13.
Supposed to. But does it?
Answer (caution… legalese here) it depends.
If (big IF) you just approach the means test mechanically, (the way most attorneys I know seem to), then it does just that.
But, if your attorney is experienced, the attorney may know ways to manipulate the bankruptcy means test, legally (of course), so that you pass the test and may be eligible for chapter 7 (or a chapter 13 that actually pay back virtually NOTHING to unsecured creditors, which is sometimes BETTER than filing chapter 7).
The first thing to understand is when the test applies, and when it doesn’t.
The first step is to compare your current income for your family size (and this means you can disregard 99% of all the websites you will find that discuss the bankruptcy means test. Almost none of them update their figures).
For accurate information go here: https://www.justice.gov/ust/eo/bapcpa/meanstesting.htm to see the current figures for your state.
But note, as I explain below, your “income” may not be your actual income at this moment!
And, figuring out your family size may be tricky.
What about the children of divorced parents?
What if you have shared parenting? (Warning, more legalese on the way…)
Although bankruptcy law is federal the application can vary from one state to another and even vary within the state. So, in Columbus, Cincinnati and Dayton Ohio, for example, either parent can claim the children.
So if the divorced parents each file bankruptcy, they can both claim the children for means test purposes.
Do you have to be able to claim the children on your taxes?
What if you don’t claim the children on your tax return? Can you still claim them as household members for means test purposes.
What if your child is living with you, and you support him 100% but he’s over 18?
Is he a student? If so, then you can probably claim him as a household member even though he is over 18 and even if you don’t claim him on your tax return.
What if the child is over 18, not a student but has special needs, and is not able to support himself?
On a case by case basis, I have been able to claim adult children in this situation as household members for mean test calculation.
What about elderly parents?
What if you support them, but they don’t live with you?
Again it depends. But if you have been contributing to their support for some time, the amount you have been regularly contributing to their support can be a deduction to help you pass the bankruptcy means test even if you cannot claim them on your tax return.
What about situations where you are supporting a child, perhaps a grandchild, but there is not court ordered custody, no support order and the actual parent is claiming the child as a dependent (even though YOU are totally supporting the child).
On a case by case basis, I have been able to claim children my clients are supporting as family members for means test purposes.
What if your income is below the median for your family size?
Stop, go no further.
You are done.
No means test for you.
How did you calculate your income?
The mean test says it measures current income.
But it doesn’t.
Not, at least, in the way you would think.
In fact, the legal calculation of current income for means test is the average for the 6 month period before the bankruptcy case is filed.
What if you just lost your job, or took a cut in pay, or you lost your overtime?
Your 6 month average would include income no longer coming in to you.
You could fail the means test but really should be eligible for chapter 7 based on today’s income level.
And, what if your income is above the median?
Then you keep going into the sometimes fantasy world of the means test.
By the way, this is where I see a lot of attorneys taking “short-cuts” in their analysis of your situation, and it is a very bad thing to do.
I do a number of “second opinion” consultations where people tell me that “they saw an attorney who said that because their income was above median, they had to file chapter 13.”
Nothing could be further from the truth, I tell them.
Maybe the attorney didn’t know any better.
Maybe the attorney did not want to take the time to “do the math.”
My clients tell me that the attorney did not even do the math.
Impossible to tell why this happens, but I can tell you that folks come to see me for second opinions because they just had a “gut feel” that the attorney either didn’t know, or didn’t care, to dig deeper into their situation and give them the best advice.
And its good that they trusted their gut.
Because in many situations, I offer options that weren’t explained by the first attorney.
I “DO THE MATH” for them.
The reality is this: all that happens when your income is above median is that you have to keep going, and do a long math question to determine if you “pass” or “fail” the means test.
If you want to do the math for yourself, here is a quick and easy online means test calculator for you: https://www.bestcase.com/cmicalc/
If you “pass” the means test then you are possibly going to be able to file a chapter 7.
“Possibly?” You ask?
Just because you pass the means test does not mean that you automatically qualify for a Chapter 7.
Sometimes you can pass the means test and fail another test, which is more of a subjective kind of “ability to pay debts” test. (if you want to look at the code section, then Google 11 USC 707 B –but it’s a bit difficult to decipher)
In other words, whether or not you can file chapter 7 also depends on whether or not you can actually afford to pay back some of your debt in an amount that would be meaningful, not just 1% in most cases, based upon a livable budget and your actual income
And in a chapter 13, you don’t pass or fail the means test. The formula is different and the results are used for a different purpose.
The means test in Chapter 13 is supposed to determine how much you would be required to pay back to unsecured creditors.
But, like the chapter 7 means test, the result of this calculation is sometimes unrealistic or flat-out incorrect.
Good news here, though.
The courts understand this.
So, courts sometimes use different approaches to achieve a result that does make sense. Even if the means test makes no sense. (thank goodness!)
For example, because the means test uses your average of six monthly income prior to filing your bankruptcy case, your actual income now could be much different (less).
When this happens, the results of a means test calculation will be totally meaningless.
So, the court will look at your expected income and use a more common sense approach to determine how much your creditors will be paid.
Like many things in the law, there are opportunities to improve the results that you will get. For example, when you are getting ready to do your taxes there are certain things that you can do, all of which are completely legal, to reduce the amount of tax that you owe.
Similarly, if you are getting ready to file a bankruptcy case, there are things that you can do, all completely legal, to affect the outcome of the means test so that you can qualify for Chapter 7 or, if you are going to file a Chapter 13, that you pay as little as you possibly can to all of your unsecured creditors.
For example, in a Chapter 7, there are certain deductions that you can take that actually help you pass the means test.
One such deduction is the payment that you make on your automobile.
So, if you’ve been scrimping and saving and making do with it car that is held together with duct tape and glue – its paid for and you really can’t afford a new one because you are trying to pay other bills – you will essentially be penalized by the means test.
What some people do is replace that car prior to filing a bankruptcy.
With the car replaced, you have a car payment which is a deduction on the means test.
You now PASS the means test.
The deduction means that there is less money available to pay unsecured creditors, sometimes nothing.
Creditors complain that the consumer is getting a car paid for at the expense of the amount of money that would be available to pay them.
This is true, in a way, but why should the unsecured creditors benefit from a consumer who is scrimping and saving and often trying to make do with an automobile that clearly needs to be replaced and is sometimes actually unsafe to drive?
Similarly, in a chapter 13 setting, we may have a situation where we have enough income to pay back something to the unsecured creditors but again we have a car that desperately needs to be sent to the junkyard.
In these cases, you legitimately need to replace your car!
After you buy a sturdy, reliable car, your excess income that would have been available to pay the unsecured creditors is now being used to pay for the car.
This means less money to pay unsecured creditors.
Also, in a Chapter 13, the interest rate gets changed from a typically high rate to a lower rate called the “Till” rate. As of January 2019, that rate, in the Cincinnati, Columbus and Dayton bankruptcy courts, is about 7% in most cases.
Actually, it is very common for people contemplating filing Chapter 13 to replace one or even two automobiles prior to filing.
The “left over” money that is paid to the unsecured creditors is significantly reduced by these deductions!
All of this is allowed by law and actually is beneficial and necessary for the consumer to get to and from work so he can successfully complete the Chapter 13 plan.
Why do YOU want to know about the means test?
Most folks I speak with are interested in the means test because they want to qualify for Chapter 7 and avoid chapter 13.
They think that a Chapter 7 is somehow better than a Chapter 13.
I get it.
I’ve been counseling clients in bankruptcy for over 32 years.
The idea that “paying nothing is better than paying something” has a kind of “common sense” appeal. But, my experience is that a Chapter 7 is not always the best answer to your financial problems.
Even when you qualify for Chapter 7, you are sometimes much better off filing a Chapter 13.
Why would a payment plan be better than a “pay nothing” plan?
This is because there are so many things that can be done in a Chapter 13 that are simply impossible in a Chapter 7.
Focusing on the means test is short sighted.
You need to look at the big picture.
Here’s an example.
Ted did the math.
He passes the means test.
He is eligible for a chapter 7.
Ted really needs a bankruptcy.
So, he should file chapter 7, right?
Not so fast.
Ted wants to keep his $20,000 car. Ted’s car payment is $526 per month because the interest rate is 24.99%.
His car has been financed for six years and so Ted will end up paying $17,910 in interest for this car.
If Ted files chapter 7, he gets rid of the other debt but still has the bad car loan.
I can take Ted’s car and pay it off in a Chapter 13 in five years at 375.00 dollars per month. Ted will SAVE $15,402.
Wouldn’t he be better off filing a Chapter 13?
Is a savings of $15,402 a good thing for Ted?
Is chapter 7 better?
Ted has a payment plan either way.
A bad plan to file chapter 7 and a much better plan in chapter 13.
Ted passes the means test, but fails the “life math” test if he files chapter 7.
(and I can testify that LOTS of attorneys will be happy to help Ted file a chapter 7 – I see this all the time. Trustee’s look at client’s like Ted and say “why are you keeping this car?… )
This is just one example of how focusing on the means test can lead you down the wrong path.
How the the “substantial abuse” test to prevents Chapter 7 even if you “pass” the means test (or even if it doesn’t apply).
The means test fails with ridiculous results and unexpected problems.
I’ve personally, through extensive pre-bankruptcy filing, filed an individual who made over $100,000 a year in a chapter 7. The court approved it with no problems whatsoever.
I’ve also seen people who pass the means test – folks with very limited income – be forced to file a Chapter 13 bankruptcy by the United States Trustee’s Office even though the amount paid to creditors was less than five cents on the dollar.
Strange, but true.
Even if you pass the means test, there is another test, called the “substantial abuse test,” 11 USC sections 707 (b)(3) that permits the United States Trustee’s Office to disapprove your chapter 7 even though you pass the means test.
I pass the means test but can’t file chapter 7.
Even if you pass the means test, if you really do have enough income left over after you pay your normal living expenses to provide a meaningful payment to your creditors, you have to.
There are many ways this kind of situation arises- with the result being that you cannot file Chapter 7 and must file Chapter 13.
Really – seeking the guidance of a certified bankruptcy attorney helps you more than anything else to find the best result.
Don’t try this at home!
What to do if you need to file and can’t get around the means test?
This is kind of a trick question, actually.
In the tens of thousands of cases are filed, I find that it is really not necessary to get around or avoid or evade the means test.
The result that you want, a financial recovery, is possible with both chapter 7 and Chapter 13.
Many who qualify for Chapter 7 are often better off filing a Chapter 13.
And, people who are in 13 often pay back nothing to their unsecured creditors.
In addition, there are many benefits of being a Chapter 13 that you cannot get in a Chapter 7.
Depending on your personal situation, you may not even need to do the means test.
You can make some changes that can help. Or, events in your life could change the outcome, so you won’t have to do the means test, if only you wait a month or two before you file.
In other cases, if you have to do the means test, there are changes that you can make that will allow you to pass the means test.
Finally, in situations where you have to do the means test and you cannot file a Chapter 7, there are things that you can do a Chapter 13. Properly prepared, your case will pay very little, if any, additional money to your unsecured creditors.
And, we often replace cars that are eating us up with costly repairs to keep them running, and really do need to be replaced.
Again, I hate to sound like a lawyer, but what’s best for you really does depend on what you need (sometimes different from what you “think” you need).
There is no one-size-fits-all analysis that can be done and there is no universal goal of trying to avoid or pass the means test that will result in the best solution to your problems.
Chapter 7 is not the “holy grail” of debt relief, and is not the best answer to every situation.
You really do need an experienced attorney and counselor to go over your personal situation. He’ll explain what you need so you get the best result.
So, don’t sweat the means test.
It’s not really the problem that people think it is.
Let your attorney figure out the best solution. He’ll explain now to get the results you need.
You may be surprised how much better off you are with the advice of experienced counsel.
The means test turns out to be a flawed attempt to force more people to file chapter 13.
The means test really fails in many cases.
I can manipulate the means test in many cases.
In nearly all cases, in my experience, the means test is not an obstacle. You can get the results you need from our bankruptcy system.
Only in a very, very few cases does the means test present a problem for us.
And, in those cases, we still come up with a very effective solution to debt problems.
So, I urge everyone to seek first the best solution for your situation. You’ll probably see, as I have, that the means test is not a factor in the solution at all.