Means Test: Don’t Give Up, Even If You Think You’ve Flunked It, Part 1

17 Nov Means Test: Don’t Give Up, Even If You Think You’ve Flunked It, Part 1

If your bankruptcy lawyer has told you about the “means test” contained in the new bankruptcy law, hopefully she has also told you that you have “passed” this test. But what if your lawyer has told that you are “flunking” the means test? You need to understand why she would come to this grim-sounding conclusion, and what you can do about it.

Maybe you can help fix this problem — after all, the means test involves financial information you gave your lawyer, information about your income, paycheck deductions, and household expenses. You know these facts better than your lawyer does — remember, she went to law school, she studied the bankruptcy law inside and out, she is the expert on the means test rules, but she has never studied your financial information before!

You are the source of this new information your lawyer is using to complete your means test. You are the only one who is equipped to make sure the information is being interpreted correctly. Here’s Part 1 of how you do it.

First of all, consider why you are even required to take this means test in the first place: because your annual income is greater than your state’s median annual income, for a household of your size. Annual income is arrived at through a statutory formula, rather than through common sense. To compute your annual income, the law says to add up your gross, before-deductions income for the six month period ending on the last day of the month before you file the bankruptcy; then multiply the result by two. Now, you have twelve months of income which give us your means test annual income. It doesn’t matter if in your unique case the result doesn’t make sense. For example, what if you just lost your job, or received an unusually large bonus, or just landed a high paying job after months of unemployment? Your means-test-formula-calculated annual income would, in these situations, be wildly different from any reasonable calculation of your true annual income. This is irrelevant; annual income is computed rigidly through the formula given above.

If your annual income is just barely over your state’s median annual income, it may be worthwhile to consider just how the six month total is arrived at: by adding up income that is received in the six month period. The means test rules say to ignore when the income was earned. For example, if you file bankruptcy any time in December, the six month period ends on the last day of November (the 30th). If you are paid on December 7 for the last two weeks of November, this paycheck is not counted for the six month period, because you didn’t receive it in November. Once again, the means test rules require adding up income received in the six month period, and the rules require ignoring when the income was earned.

This can be especially important for persons paid weekly, or paid every two weeks. Persons paid twice per month, such as on the first and fifteenth day of each month, will always have two paychecks per month. However, persons paid weekly or biweekly will have at least two, or as many as five, paychecks per month. And, because the means test rules mandate that the six month period ends on the last day of the month, persons with weekly or biweekly pay periods may find that selecting the “wrong” six month period captures within it more paychecks than another six month period. In a close case, you should see if waiting one month to file the bankruptcy, which moves the six month period one month further ahead, results in your receiving less paychecks in the newly-selected six month period.

Sounds complicated? Maybe, but maybe then again not. Remember, if your annual income is less than your state’s median annual income, then you automatically pass the means test by not even having to take it! Also, the smaller your annual income, the smaller your monthly income, which is your annual income divided by twelve; the smaller your monthly income, the more likely you are to pass the means test. This result is certainly worth getting out your calculator, or firing up an Excel spreadsheet, and doing some math, whether your lawyer asks you to or not. Remember, it’s your bankruptcy case, involving your income figures. You can and should be intimately involved in performing the income calculations used in the means test.

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Craig Andresen is a Minnesota bankruptcy attorney who represents both consumers and small business owners in chapter 7 and chapter 13 cases. With thirty years experience, Mr. Andresen is a frequent speaker on the topics of stopping mortgage foreclosures, and stripping off second mortgages in chapter 13. His office is located in Bloomington just across the street from the Mall of America. Call his office at (952) 831-1995 for a free consultation about protecting your rights using bankruptcy.
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