An above-median income Chapter 7 debtor must pass the Means Test to avoid a mandatory five year Chapter 13 case. The Means Test takes the debtor’s income, subtracts IRS-allowed expenses and secured debt payments, and forces a Chapter 13 filing if the difference can pay a sufficient amount of debt. Here’s a short list of tricks and traps:
1. Secured debt payments are subtracted. Get rid of the clunker; you’ll have to replace it during the next five years anyway.
2. $200 is a “secret” added vehicle operating expense if the clunker is more than six years old or has more than 75,000 miles. It’s found in the Internal Revenue Manual and has been accepted by the United States Trustee.
3. The median income applied is that for the debtor’s household, not family. Girlfriends, boyfriends, and roommates count, at least in Minnesota so far. The law is too new for much interpretive case law.
4. Maximize your IRS-allowed retirement contributions.
5. Continue with your charitable contributions.
6. Actual income tax obligations, and not actual tax withholdings, are subtracted from income. A tax refund means your deductions are higher than your actual obligation, so you cannot subtract your withholding.
As with everything else, you are simply not allowed to rely on general legal information posted on the Internet for your own particular situation. Discuss this with your attorney. Do not try this at home.
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Last modified: April 13, 2008