The Means Test was part of the Bankruptcy Reform Act of 2005. Its purpose was to devise an income test to determine eligibility to file a Chapter 7 bankruptcy. The means test is a backward looking test which averages the Debtor's income over the six month period prior to filing the case. It compares that income to the median household income in Debtor's county for a household of a similar size. If the income is below the median income, the Debtor is presumptively eligible to file a Chapter 7. If the income is above the median, it requires additional analysis to determine if a Debtor is eligible to file Chapter 7.
If the Debtor's income is over the median, he may still be able to file Chapter 7 depending on his expenses. The IRS has developed certain allowances for housing, transportation, medical expenses etc. which may be deducted from the Debtor's income. There are also additional IRS allowances based on taxes, insurance, child care, telecommunications needs, charitable contribution etc. In addition, the Debtor may also subtract payments for secured loans such as mortgages, vehicles and other secured property. Priority debts such as child support and alimony may also be deducted from the Debtors income. A Debtor fails the means test, if after deducting all of the allowable expenses from their average current income, he has approximately $100.00 or more available to pay creditors. Failing the means test creates a presumption that the case should not be eligible for Chapter 7.
If the Debtor fails the means test, the U. S. Trustee will generally bring a motion to dismiss the case. The motion can be defended against by showing special circumstances. Special circumstances can be a reduction in income or job loss. Other special circumstances could be a long commute, high medical bills, student loan payments etc.
Even if a Debtor passes the means test, the U.S. Trustee may file a motion to dismiss the case. The U.S. Trustee reviews the Debtors current income and expenses listed on the bankruptcy schedules to determine if the Debtor has available income to pay creditors. For example if the Debtor passed the means test because he was out of work during the period used to calculate his income and now has returned to work with a substantial income and an ability to repay creditors, the Trustee will file a motion to dismiss. In fact most of the motions brought by the U.S. Trustee are the result from this type of case.
Not everyone is required to take the means test. One major exception to excuse the means test is if the debts are not primarily consumer debts. If a person debts are primarily business related, they are excused from taking the means test. There are also exceptions for military personnel in some circumstances.
The means test is also used in Chapter 13. The test is slightly different in Chapter 13 bankruptcy and allows a Debtor to include deductions for pension contributions and pension loan repayments as well as administrative expenses. In Chapter 13, the amount available after the means test calculation is used as a starting point on how much unsecured creditors should be paid under the plan. However if the Debtors schedules show that the Debtor can afford to pay more that the means test calculation, the Trustee will require the greater amount be paid.
The means test is interpreted differently in different jurisdictions and even differently among Judges in the same jurisdiction. Judges have different opinions as to what constitutes income and allowable expenses. A Debtor can affect the results of the means test in a variety of ways. The Debtors household size affects the means test. The Debtor can wait to file, if his income was substantial during the prior 6 month period and has now decreased. The Debtor may incur certain allowable expenses such as health insurance that they had previously not had.
The means test is a threshold test to determine whether a Debtor should file a Chapter 7 or Chapter 13 bankruptcy. The means test is a complex test which requires considerable analysis of a Debtors income and expenses and familiarity with its interpretation by the Trustees and Judges in the Debtor's jurisdiction . It is wise to seek the opinion of an expert before proceeding to file bankruptcy.