If your income is low enough, you can pass the first part of the “means test” and don’t even have to take the second part. But even if your income is high, you may still be able to pass the test and file a Chapter 7 case. You just need to pass the second part, the expenses part.
In our last blog we explained what it takes to pass the first part of the “means test”—the income portion. Remember that “income” for the purposes of the means test include just about every source of money, not just taxable income. Also “income” has an odd definition, one that often results in your “income” going up or down every month. This means that the timing of the filing of your Chapter 7 case can affect whether or not your “income” is below your state’s “median income” and thus passes the means test. But if you have very steady and moderately high wages, or have little choice about when you must file your bankruptcy case, your “income” may be too high to pass the means test. Then you must pass the second—expenses—part of the test. If you don’t pass it, you will likely be required to file under Chapter 13 instead of 7.
Passing the expenses part of the means test involves 3 steps.
Deduct certain expenses to determine if you have any “disposable income.” If you don’t have any disposable income, then you pass the “means test.” Many of these expense amounts come from local and national standards established by the IRS, plus other necessary and actual expenses, including secured debt payments (on mortgages and vehicle loans). Generally speaking, the larger your expenses, the more likely you will not have “disposable income.” Also, your allowed expenses will more likely be larger if you are making payments on your home and vehicle(s).
If you do have “disposable income” after deducting your allowed expenses, then you still pass the “means test” if the amount of “disposable income” is low enough. If the amount of monthly “disposable income” is less than $117, you pass. If the amount is $195 or more, you don’t pass this part of the test (but may still pass with the next step). If your monthly “disposable income” is somewhere from $117 to $194, then we apply a formula: multiply the monthly “disposable income” by 60, and compare that amount to 25% of your “general unsecured debts” (debts without collateral which don’t belong to a special set of “priority” debts). If 60 months of your “disposable income” is less than this 25% amount, then you pass the “means test.”
If you’ve still not passed the “means test,” you may still do so “by demonstrating special circumstances,” meaning either a) additional reasonable and necessary expenses which are not otherwise allowed in the step above, or b) adjustments to income reflecting a reality not shown by the standard calculation of income.
As shown above, there are a number of ways to meet the “means test.” The practical truth is that most people who want to file a Chapter 7 case can do so. But as you can also see, it can get complicated, and much more so than we can show here. On one level, the “means test” involves the application of some relatively simple mathematical formulas. But on a deeper level, it also gets into a myriad of evolving rules and judgment calls about what expenses are allowed, what qualifies for “special circumstances,” and other issues. This is not a do-it-yourself project.
Before we end we have to add that the “means test” only applies in Chapter 7 cases when the person’s “debts are primarily personal debts.” This means that if more than 50% of your debts are business debts, then you don’t even need to take the “means test” to qualify for Chapter 7. That’s also true for certain disabled veterans, and for other military servicemembers who served in active-duty under specific conditions. At your initial consultation, we’ll discuss the details of these exceptions to see if they apply to you.