The Bankruptcy Means Test

11 Nov The Bankruptcy Means Test

The means test is one of the first things that your attorney needs to prepare in order to file a consumer bankruptcy. The results of this process will tell you whether you qualify to file a Chapter 7. And it will tell you what your monthly payments would be if you were to file a Chapter 13.

This is really a two part test. First is the determination of whether or not you are under “median income.” If you are above “median income” then the more compressive “means test” needs to be completed. This is a calculation starting with your income (and all income contributed to the household) less your normal living expenses. Sounds easy. But it’s not.

Although the means test needs to be done, at least to some extent, in both a chapter 7 and a chapter 13 bankruptcy, it is perceived somewhat differently in each. There just seems to be an easier, more cursory examination of the form in a Chapter 7 than in a 13.

The reason for this can be understood by examining the chief difference between the two types of bankruptcy. In the Chapter 7, the means test is a snapshot of your financial condition on the day you file the bankruptcy. Thus, if you owe money on a house payment, you have that expense, even if you are giving up the house or it is in foreclosure.

In a Chapter 13, however, the purpose of the means test is to measure the amount of money you will have available to pay your creditors over a three to five year period. So, if you are giving up the house, that money will be available for you to use to pay creditors and therefore cannot be included in your expenses. [Please note that there are a several districts that treat a Chapter 13 means test the same as in Chapter 7 – but such treatment is declining rapidly.]

The means test can be as simple as completing a comparison between your annual gross income and the “median income” allowable in your State for a family the same size as yours. Or it can be as complicated as a 61 line tax return. It’s always best to have a competent bankruptcy attorney work through this for you to insure an accurate result.

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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