Means Testing in Bankruptcy

One of the most complicated provisions of the new bankruptcy law arises from a new set of rules called “means testing.” Applicable in both Chapter 7 and Chapter 13 cases, the purpose of means testing is to disqualify from Chapter 7 those debtors whom the means test calculates can repay their bills in a Chapter 13 repayment plan. In the Chapter 13 setting, the means test will determine whether you pay for three years or if you have to extend to a five year repayment plan.

The “means test” is actually a two part test, and it begins when we analyze your gross household income over the last six months. When you meet with me, I will ask you to bring in pay stubs (also called “pay advices”) from the past seven months. If you are married, you must bring in pay stubs for your spouse, whether or not your spouse intends to file.

Once I have a complete set of pay stubs in hand (or a printout from your employer if the actual pay stubs are not available), I will calculate the average monthly gross income for your household size. This is called the “median income” part of the test.

Next, I will compare the average gross income for your household to the household income tables provided to me by the Office of the United States trustee. The average income figures for Georgia are:

family of 1: $35,412
family of 2: $48,800
family of 3: $53,563
family of 4: $64,427
add $6,300 for each individual in excess of 4

If your average monthly income for your family size is below these figures, we do not have to go any further - you are eligible to file Chapter 7. Note also that these figures will change every six months based on data collected by the IRS and the census bureau about household income in each State. You can expect that the median income figures will go up with each revision, meaning that people whose household income is slightly higher than the median income might want to consider waiting until the next revision. The most recent revision of the median income figures was October 1, 2006. We expect that the next revised figures will be released in February, 2007.

If your average monthly income exceeds the above figures, we must proceed to a detailed “means test” analysis.

The means test is designed to determine whether you have sufficient disposable income to make a Chapter 13 repayment plan work. We prepare a list of expenses, but instead of using your real life expenses, we are required to use allowable expense figures as determined by the IRS. As you might imagine, the IRS budget standards are not particularly generous

Because the means test numbers are based on IRS figures rather than reality, you should view the means test as a “yes/no” qualification test. The means test will tell us the following:

you qualify for Chapter 7 because your annual household income is below the average household income for a family of your size in the State of Georgia. You may therefore file either a Chapter 7 or a Chapter 13
you qualify for a Chapter 7 even though your income exceeds the median income numbers because the means test says that you have less than $100 left over at the end of the month. You can therefore file either a Chapter 7 or a Chapter 13
your means test numbers show that you have between $100 and $166.67 left over at the end of the month. If you file a Chapter 7, there will be a “presumption of abuse” and we will have to argue that your real life budget does not leave you enough money to pay back creditors in a Chapter 13. You can file a Chapter 13, but you are allowed to file a 3 year plan instead of a 5 year plan
your means test numbers show that you have over $167 left over at the end of the month. If you file a Chapter 7, there will be a “presumption of abuse” and we will have to argue that your real life budget does not leave you enough money to pay back creditors in a Chapter 13. You can file a Chapter 13, but you must file a 5 year plan

You can review the IRS standards for food, housing, clothing transportation and other allowable expenses at the United States Trustee web site. The computer program I use to generate your bankruptcy petition has these IRS standards encoded within the program so we can easily run “what if” scenarios.

If the means test analysis shows that you have no disposable income or if it shows that you do not have sufficient income to support a Chapter 13, we can go ahead with a Chapter 7 filing. If, however, the means test analysis shows reveals more than a tiny amount of disposable income, you will be required to file a Chapter 13.

The Courts have recently begun to address a debtor’s options in a Chapter 13 case when household income has gone down despite a means test calculation that indicates that the debtor has sufficient income to fund a Chapter 13.

There is a very small amount of wiggle room built into the means test, meaning that if you have unusual expense needs we can exceed the standard numbers. However, at this point, there have not been very many appeals court ruling on these exceptions so we do not yet know how much wiggle room we will have.

You may also want to review or subscribe to my Georgia Consumer Bankruptcy Blog where I discuss recent developments in the new bankruptcy laws. Another very helpful Georgia bankruptcy blog is published by my colleague, Scott Riddle. Scott’s blog discusses judicial decisions that address the new law and offers helpful insight as to the how the 2005 BAPCA law is being interpreted.

I can get started with analyzing your situation if you will download my new client questionnaire, and fax it along with documentation of the past 7 months of income. Or feel free to call my office at 770-393-4985.

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