What Is The Means Test?

Effective October 17, 2005, Congress amended the bankruptcy law to impose new income-related requirements for an individual or a married couple who file Chapter 7. You can think of the means test as a debtors’ prison, erected by creditors and designed to lock you in debt and either keep you from filing bankruptcy or force you into a Chapter 13 payment plan. However, there are keys that unlock the door to the prison. Our experience has been that few clients are prevented from filing Chapter 7 due to the means test. The keys that unlock the prison and allow you to “pass” the means test are as follows:

 1. First, the means test does not apply unless more than 50% of your total debt is consumer debt. A consumer debt is a debt incurred primarily for a personal, family, or household purpose. Business debts, tax debts, and tort claims are not consumer debts.

 2. Secondly, the means test does not apply to an individual or married couple if the “Current Monthly Income” (“CMI”) of that individual or married couple exceeds the median income of a household of the same size in North Carolina. The following chart sets out the median income for households in size from 1 to 6. Add 6,300.00 for each person in excess of six. SIZE 1 2 3 4 + 5 6 Median Income $33,510.00 $43,532.00 $50,874.00 $56,985.00 $63,285.00 $69,585.00 The determination of the CMI is not calculated from your current income, but rather is based on your average income received during the six-month period ending on the last day of the month prior to filing the bankruptcy. Furthermore, certain income, such as social security benefits, are not included in the calculation of median income. The rules on calculating CMI is complicated and is not covered in this basic overview. It is mandatory that you be able to provide us with accurate information and documentation concerning your income for the prior six months, as well as a prediction of future income.

3. Even if your CMI exceeds the median income, you can pass the means test by establishing that your expenses leave you with insufficient funds upon which to pay a significant amount on your debts. The rules on determining these expenses are quite complicated and are not covered in this basic overview.

4. Even if the deduction of the expenses set out at paragraph 3 are not enough to set you free you from debtors’ prison, there is a final key to the debtors’ prison

known as “special circumstances” that may unlock the door. Special circumstances are those circumstances which justify additional expenses not included in the approved expenses set out on the Bankruptcy Code or which justify adjustments to the calculation of current monthly income. There must be no reasonable alternative to the additions or adjustments. Examples of special circumstances are a serious medical condition or a call to active duty in the Armed Forces. In order to establish special circumstances you must itemize each additional expense or adjustment to income and provide both documentation for such expense or adjustment and a detailed explanation of the special circumstances that make such expense or adjustment to income necessary and reasonable. You must attest under oath to the accuracy of any information provided to demonstrate special circumstances. The following two examples illustrate the calculation.

Example 1:

John Smith is a single man who lives alone. He is unemployed from May 25, 2006 to July 20, 2006 and receives no benefits. He obtains a job on July 21, 2006 at

an annual salary of $45,000.00. He files a Chapter 7 bankruptcy on December 15, 2006. His gross income from July 21 to November 30 is $15,500.00. To calculate

John Smith’s income under the bankruptcy law, multiply $15,500 by 2 (to convert the six months to annual amount). The result of $31,000.00 is less than the median income of $33,510.00, and John Smith “passes” the means test. If John Smith waits until January 2, 2007 to file bankruptcy, his income for the six-month period from July 1 to December 31 will be approximately $19,250.00 ($38,500 on an annual basis). To determine if John “passes” the means test, it will require an analysis of his expenses under the rules set out in the BankruptcyCode.

Example 2:

Joe and Jane Doe have 2 children. Jane works for the State and earns a flat salary of $36,000 ( $3,000 per month). Joe was working for a telecom company and was

earning $60,000 per year. On April 30, 2006, he is in a serious automobile accident and is permanently disabled. He receives gross private disability income of $2,500.00 per month for 6 months (May – October). Effective December 1, 2006 he will start receiving social security disability benefits of $1,800.00 per month and his private disability will stop. If the Does’ file bankruptcy on December 15, 2006, their income from May 1, 2006 to October 31 is $33,000 ($5,500.00 + 6). On an annual basis the debtors’ income is $66,000, which exceeds the median income $56,985.00 for a household of 4. However, if they wait until February 1, 2007 to file, their income for the six months period of August 1 to January 31 is as follows:

Wife’s Income: $18,000.00

Husband’s Income : $7,500.00 - $25,500.00

Remember social security is not included in CMI. The annual income is $51,000, and is below the median income.

From these two examples, the following lessons are learned:

1. Calculating median income is technical and sometimes complicated.

2. Timing can be crucial in passing the means test.

3. The client must provide very reliable information about past income, and in some cases, a prediction of future income.

**The information you obtain at this site is not, nor is it intended to be, legal advice. You should consult an attorney for individual advice regarding your own situation.**