What is the Means test?
The means test was explained in the Chapter 7 FAQ. In a chapter 13 it is complicated because of a change in the definition of “disposable Income”. §1325(b)(2) The form used is Official form B22C. The problem is that the disposable income test, under either 7 or 13 median income approach, will not be an accurate measure of future ability to pay in the Plan. The test is a look back, not forward in time. In addition to other deductions, charitable contributions, up to 15% of gross income, is included §1325(b)(2)(A)(ii).
The means test is used in cases where the Chapter 7 individual debtor’s(s’) current monthly income exceeds the state’s median family income. It is used to determine if a debtor has the ability to repay a minimum level of general unsecured debt after the payment of allowable monthly expenses. If the means test shows a debtor has such an ability to repay, there is a “presumption of abuse.” In other words, if the debtor(s) receive(s) a Chapter 7 discharge, this would be an abuse of the bankruptcy process, because the debtor(s) may have the ability to repay debts outside of bankruptcy or through a Chapter 13 repayment plan over time. The analysis involves application of certain IRS guidelines for expenses in determining the ability to repay as well as a review of income from the previous six months to determine if the debtor(s) is/are above the median income for the state where they reside. The links to the IRS guidelines and median income information are found on the United States Trustee
The means test is explained in the Chapter 7 FAQ. In a chapter 13 it is complicated because of a change in the definition of “disposable Income”. The form used is Official form B22C. The problem is that the disposable income test, under either 7 or 13 median income approach, will not be an accurate measure of future ability to pay in the Plan. The test is a look back, not forward in time. In addition to other deductions, charitable contributions, up to 15% of gross income, is included.
The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which took effect on October 17, 2005, implemented a new “Means Test” for debtors to satisfy in order to successfully file for Chapter 7 Bankruptcy. The Means Test determines whether you are eligible to file for Chapter 7 Bankruptcy. Under the Means Test, a person must show inability to pay a minimum of $100.00 per month for 60 months to any unsecured creditors from disposable monthly income. If a person is able to pay $100.00 per month or more to unsecured creditors for 60 months, the Chapter 7 may be dismissed or converted to a Chapter 13.
The “Mean’s Test” is a formula that determines whether the person filing for bankruptcy protection has enough income to pay the expenses that are allowed, plus extra money to pay to non-priority, unsecured creditors such as credit cards. The Debtor must calculate their “current monthly income”, including all income from spouses, rents (minus expenses), bonuses, plus “help” Debtor has been receiving from family or friends. Allowed living expenses and payment of secured and priority debts are subtracted from the total income for a net income or monthly disposable income that could be used to pay unsecured non-priority debts. The chapter 7 can be challenged if the net income, multiplied by 60, is greater than (1) either 25% of the nonpriority unsecured claims or $6,000, or (2) greater than $10,000. The Debtor may be required to convert the case to a chapter 13 or lose the bankruptcy protection completely. §707(b). To understand the Mean’s Test you must first understand some of the terms.
