26 Jan “Median Income” & “Means Test” – Important terms defined
Two terms that you may see frequently when you are learning about bankruptcy are “median income test” and “means test.” You will be able to make better decisions about filing bankruptcy and about choosing a lawyer if you understand what these terms mean. Here are brief definitions:
Median income test – in cases where your debt is primarily consumer (not business) debt, the Bankruptcy Code requires that you calculate something called your “median income” and compare it to the median income for a similarly sized family in your State.
Stated simply, you calculate your median income by adding together your gross income for the six months prior to the current month and divide by 6. For example, if you are filing in January, you use July through December’s gross income numbers.
If your average monthly income using this formula is below the average monthly income for a similarly sized family, you pass the median income test and you may proceed to file either Chapter 7 or Chapter 13 without further means test calculations. You can review the current median income figures at the U.S. Trustee web site. Note that these median income figures change (revised upwards) at least once a year, usually in October or February. If your median income figure is just over the limit for your State, waiting a few weeks or months can save you and your lawyer a lot of work.
Means test – If your average monthly income exceeds the median income for a family your size in your State, then you have to satisfy the means test if you want to be eligible to file a Chapter 7 or a Chapter 13 that lasts less than 5 years.
The purpose of the means test is to determine whether you have sufficient “disposable income” to fund a Chapter 13. If the means test reveals that you have more than $100 left over at the end of the month, you will not be eligible to file Chapter 7 (unless you and your lawyer are able to convince a bankruptcy judge that special circumstances exist).
Often, a means test calculation will result in a conclusion that you have money left over at the end of the month when in reality you do not. There is a reason for this. When creating a means test budget, you do not necessarily plug in what you really spend for expenses like housing, food or transportation. Instead, you must use IRS numbers for most of your household expenses.
For example, in real life, you may spend $700 a month for food for your family of four. The IRS derived table, however, might limit you to $574 for food costs. For means test purposes, therefore, you have $126 “available” to pay creditors in a Chapter 13.
The means test expense categories also do not include allowances for student loans or loans against retirement plans.
What happens, therefore, is that prospective bankruptcy debtors end up with a means test that shows disposable income, while in reality, they are spending more than they are taking in.
As you might imagine, arguments and challenges to means test calculations are frequently filed by bankruptcy lawyers who are trying to help deserving debtors fit into Chapter 7. Debtors with annual incomes in the $60,000 to $100,000 range seem to be the ones that have the most trouble qualifying under the means test. If your income is in this range, talk to a qualified and experienced bankruptcy lawyer to evaluate all of your options under the current bankruptcy rules.
by Jonathan Ginsberg, Atlanta bankruptcy lawyer
Jonathan Ginsberg, Esq.
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