Filing bankruptcy involves several stages. First, potential debtors should gather all bills, bank statements, tax returns, and proof of household income from the previous six months to calculate means tests; most people filing Chapter 7 or Chapter 13 bankruptcy must pass to be granted bankruptcy protection.
Every bankruptcy application must include income. Chapter 7 is intended for couples or individuals with few assets or income who can no longer make monthly payments to creditors. In contrast, in Chapter 13 payments can be more affordable – the means test determines who qualifies for Chapter 7 relief and how much debtors must remit each month in Chapter 13.
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What Is Means Test?
In October 2005, the means test was added to bankruptcy law to establish objective criteria to help identify who could file for Chapter 7 instead of Chapter 13 relief bankruptcy and thus provide relief for high levels of consumer debt. It only applies when seeking relief through Chapter 7.
The Means Test in Chapter 7 is straightforward and easy to conduct. Simply compare your family income against that of similar-sized families in your state’s median and see whether or not it falls below. If it does, “pass” means test and you may qualify to file for Chapter 7 bankruptcy; otherwise further analysis will be undertaken to assess the funding capacity of the Chapter 13 plan by adding actual and standard expenses back in.
Assumptions arise when household income exceeds median levels; thus prompting some debtors to believe Chapter 7 bankruptcy filing would be abusive or not appropriate. Debtors can challenge such presumption using means tests; for a means test to be effective your income must have been earned over six months before bankruptcy filing – regardless of current earnings.
Current Monthly Income and Means Test in Chapter 7
Our bankruptcy lawyers use this test to calculate your Current Monthly Income (CMI). CMI includes household income from all sources (if filing as an individual but married filing under Chapter 7, your spouse would also contribute). Also called the look-back period or six months prior, should your filing on May 10 take place this period would include earnings between April last year with qualifying income being added up and divided by 6 in order to calculate CMI.
Household income refers to your total resources that cover most but not all common household costs. Wages from employment such as businesses or self-employment as well as contributions such as those made by family or roommates paying utility bills included as household income as are child support payments and alimony as well as rent payments, interest payments, dividends or royalties you report as part of this calculation.
How and When to File Bankruptcy and Calculate the Means Test
The means test in Chapter 7 plays an essential part in bankruptcy cases; its calculation determines eligibility for filing or how much an individual owes their creditors under Chapter 13. Your filing date could have an effectful means-test calculation which impacts your case in unique ways.
Calculating your CMI involves taking your household income over the past six months and dividing it by six. While this should provide an accurate representation, your CMI could fluctuate due to unexpected income sources – like bonuses for holidays – which could disqualify someone from filing Chapter 7 bankruptcy, or force someone owing on Chapter 13 payments into paying more money than they can afford. It is possible to exclude this bonus income by waiting four or five months until filing your bankruptcy case – eliminating it and leaving Chapter 13 filing open instead!
Means Test in Chapter 13 Bankruptcy
A means test provides an indicator for many debtors as to their eligibility to file Chapter 7 bankruptcy and how much unsecured creditors must be paid back by those who don’t meet the criteria to do so.
After going through the means test and taking into account certain expenses and deductions from one’s disposable monthly income, what remains is known as their disposable monthly income. DMI calculations involve subtracting various allowable expenses and deductions such as mortgage payments, health insurance premiums, and employment taxes from their total monthly income – mortgage payments being allowed, along with health insurance costs and employment taxes among others – not necessarily reflecting actual costs; for instance, a married couple can claim $650 as maximum rental expenses regardless of what they pay in rent!
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Costs to Consider in Calculating the Means Test
A debtor often pass their means test by considering both their income and household size about certain expenses that could help qualify them for Chapter 7 bankruptcy or reduce payments under Chapter 13. When exceeding median income can help qualify a person, certain expenses could help qualify them for Chapter 7 or allow reduction of payment obligations under Chapter 13.
Tax Debt
Debtors with tax obligations may subtract them from their income to meet tax payments and pass means-test requirements more easily. Payroll taxes alone may often suffice in meeting means-test criteria.
Secured Debts
IRS standards for car and living expenses can help determine your deductions for secured debts such as mortgage payments or car payments that exceed the standard deduction limit, such as car or mortgage loan payments that exceed that amount each month. You can deduct whatever portion exceeds this standard deduction amount; which means test calculations take into account payments over sixty months so the actual monthly payment deductible might be smaller.
Involuntary Employment Costs
Certain jobs require mandatory deductions such as union dues, retirement contributions, or uniform cleaning expenses which can be deducted.
Health Care Deductions
You can deduct medical costs that exceed the IRS standard amount that isn’t covered by health insurance plans as tax-deductible expenses.
Bottom Line!
Contact our experienced bankruptcy attorney at Bruner Wright PA today for a free consultation regarding bankruptcy and means test in Chapter 7.
Filing can be complex. Decisions taken before filing can have lasting ramifications on its likelihood of success – especially with Chapter 7 and 13 cases, where decisions related to means tests play an essential part in filing successfully.
In a Hurry? Dial +18-503-850-342 Now!