The Means Test, officially known as the Statement of Current Monthly Income, is a nasty provision added to the Bankruptcy Code in 2005 after predatory credit card issuers convinced Congress that too many debtors were filing bankruptcy and discharging millions of dollars in credit card debt that they otherwise wouldn’t have had were it not for the credit card companies’ aggressive marketing techniques. If you think that statement shows I’m cynical about the Means Test, you are 100% correct.
Anyway, the Means Test determines who can file Chapter 7 and who must file Chapter 13. In Chapter 13, the Means Test also tells the debtors how much they have to pay. Sometimes what the Means Test tells a Chapter 13 debtor she has to pay is beyond her ability. I’ve previously written about that problem here.
The Means Test works by looking at the debtor’s Current Monthly Income, which is a term of art under the Bankruptcy Code. Current monthly income, or CMI, is calculated by taking the debtor’s gross income from all sources for the six months immediately preceding the month in which the calculation is made, determining the average monthly income (which then becomes the CMI), multiplying that CMI by 12 to arrive at an annual income, and then comparing that annual income to the median income for a family of the debtor’s size in the same county where the debtor lives.
Here’s how it works. The attorney gets all of the debtor’s income (both spouses if the debtor is married and they live together) for the prior six months. Suppose that comes to $24,000. He divides that by six to arrive at current monthly income of $4,000. He then multiplies this by 12 to arrive at annual income of $48,000. This is compared to the median income for a family of the debtor’s size in the county in which the debtor lives. Suppose that median income is $52,000. Because the debtor’s calculated income of $48,000 is less than the median income of $52,000, the debtor “passes” the Means Test, meaning she can file Chapter 7.
On the other hand, if the debtor’s income was $60,000, she is above the median and the Means Test presumes that she must file Chapter 13. The debtor is what is called an “above-median income” debtor, which is a nice way of saying she flunked the Means Test.
It should be evident that the Means Test has several drawbacks. First, just because the debtor had average income of $4,000 or any amount over the last six months is no guarantee that income will continue in the future, so the Means Test is a poor predictor of the debtor’s future abilities. Yet for an above-median income debtor in Chapter 13, the Means Test is how the plan payment is calculated. Secondly, suppose the last six months contained an abnormally high income in a couple of months, like a one-time bonus or extra overtime. That will skew the calculation, and might force the debtor into Chapter 13 where she really doesn’t have to be.
In the opinion of most bankruptcy attorneys, the Means Test was an unnecessary and cumbersome addition to the Bankruptcy Code that, along with several other of the 2005 amendments, caused bankruptcy fees to more than double. If you have bankruptcy questions, contact us for a free consultation.