Ever since the 2005 amendments to the Bankruptcy Code, the phrase “means test” has struck fear in the hearts of bankruptcy attorneys and debtors alike. The words “means test” never appear in the Bankruptcy Code, but they are shorthand for Official Form 122A, “Statement of Current Monthly Income” in Chapter 7; and Official Form 122C, “Statement of Current Monthly Income/Calculation of Disposable Income” in Chapter 13.
In brief, in either Chapter 7 or Chapter 13 the Means Test compares the debtor’s “current monthly income” against the median income for a household of the same size as the debtor’s. If the debtor’s current monthly income on an annualized basis exceeds the median income, there is a “presumption of abuse” if the debtor files Chapter 7. Usually that means the debtor is forced into Chapter 13, if she still wants to file bankruptcy.
But the Means Test doesn’t stop there. In many cases, the Means Test tells the debtor how much money she has to pay to her creditors. Before the Means Test, the monthly payments in Chapter 13 were determined by the debtor’s budget: monthly income, minus payroll deductions, minus living expenses, such as mortgage or rent, food, clothing, utilities, medical expenses, insurance, etc. Whatever was left was what the debtor paid each month. The Means Test says, we’re going to tell you what your legitimate expenses each month are, and we’re going to calculate what is left over. We’ll call that number your disposable income, and that is the amount that has to be paid to unsecured creditors every month for the life of the plan (five years or 60 months). If there are other debts to be paid in the Chapter 13, such as mortgage delinquencies, car payments, domestic support obligations, back taxes, all of these have to be factored into the monthly payment in addition to the disposable income, because that amount is for unsecured creditors.
Here’s how it works. Let’s say your take home pay (gross income after payroll deductions) is $7,000 and your monthly expenses are $6,500. Before the Means Test, $500 was your disposable income and that’s what you paid each month. All creditors were paid out of that amount, regardless of the type of debt. But under the Means Test once you calculate the take home pay, the Test tells you what expenses are allowed, using IRS standards. Maybe those standards say that your expenses are only $6,200. According to the Means Test, your disposable income is $800 ($7,000 – $6,200), and that full $800 has to be repaid to unsecured creditors. If you also have other debt, like a car payment, past due child support, a mortgage delinquency, taxes or the like, you have to come up with enough money on top of the $800 to repay those debts.
What if you don’t have that much money left over each month? What if you really only have $500 after your expenses? Or what if you could pay the $800 per month but that isn’t enough because you have some of those other debts? That’s too bad. Your plan is not feasible, meaning it just won’t work. That means your case will be dismissed unless you can massage the Means Test, convince the court you have extraordinary expenses and the Means Test shouldn’t apply, or have a fairy godmother to make up the difference.
It’s a sad reality, but a lot of debtors just can’t propose a feasible plan. Consequently, Chapter 13 won’t help them. If you need bankruptcy advice, contact us.