Means Test: Don’t Give Up, Even If You Think You’ve Flunked It, Part 2

21 Nov Means Test: Don’t Give Up, Even If You Think You’ve Flunked It, Part 2

If you are considering filing bankruptcy, you should know that the “means test” created by the 2005 Bankruptcy Reform Act can actually be understood by both your lawyer and you –and understanding the means test is the first step toward “passing” it.

In Part 1 of this series, we looked at how the means test uses a six-month average of your income to arrive at your current monthly income, which is the basis of the means test.

Part 2 will look at households with more than one income source. This can include married couples, those who live with their partners, gay couples, or unrelated roommates. When is the other person’s income counted?

“Income” is defined in the bankruptcy law as all income received by the debtor in the six month reporting period, plus any other money paid on a regular basis toward the household expenses of the debtor or his dependents (11 U.S.C. section 101(10A)). This means that if a married couple files a joint bankruptcy case, their income consists of both spouses’ income. This seems simple enough, so far.

What if, instead, the husband is filing bankruptcy, but the wife is not? “Income” for the means test will consist of the husband’s income, plus whatever income his wife receives that she pays toward his household expenses. Income she receives that she spends only on herself, for expenses which are not household expenses, is not counted toward his means test income. This is called the “marital adjustment.”

For example, income received by the wife which is spent on groceries eaten by the husband is “income,” but income earned by the wife which is spent on her student loan payments is not “income.” In the extreme case where a wife were to pay her entire paycheck toward her own debt payments, none of her income would going toward the husband’s household expenses, and consequently none of her income would be added to her husband’s for his means test income.

Here’s another example: a wife files a bankruptcy, but her husband does not file with her. They live in the same household; she is not employed; he is employed; his entire paycheck is spent on rent, groceries, and household living expenses they share; none of his income is spent on anything that is solely for his benefit. The wife’s means test income would be the exact amount of her husband’s income, because he pays all of his income to her household expenses.

What if the debtor lives in an apartment with a roommate, and they split the rent, keep separate checking accounts, and otherwise have completely separate financial affairs? The debtor’s means test income would be only his own income, because the roommate’s income is not being paid toward the debtor’s household expenses.

Okay, now let’s change the facts slightly: the roommates have a joint checking account and commingle their income, paying for each other’s household expenses from this common checking account. Now, whatever portion of the roommate’s income which is used to pay the debtor’s household expenses will have to be added to the debtor’s means test income.

Notice how this is true even if the two are not married. The means test rules apply in this manner to any bankruptcy debtor who has somebody else who is paying his or her income toward the debtor’s household expenses. This “someone else” can be a spouse, live-in girlfriend, platonic friend, gay partner, or anyone on earth; it only matters whether the “someone else’s” income goes toward the debtor’s household expenses.

To correctly figure out their means test income, persons with non-filing spouses or partners need to be aware of the income tracing rules explained above. Carefully accounting for non-household expenses can easily make a big difference when your lawyer calculates your means test income. You can help your lawyer help you, by making sure you’re involved in this critically important income calculation.

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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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