Any bankruptcy petition must include income. Chapter 7 is for individuals and couples with modest assets and incomes. Chapter 13 is for individuals who can make a monthly payment. The Means testing in Chapter 7 will determine whether a person qualifies for Chapter 7 bankruptcy and how much the Chapter 13 debtor will pay creditors.
There are many depths to the bankruptcy process. The individual debtor should gather all bills, bank statements, tax returns, and records of household income for the past six months before filing. The incomes will be used by our attorneys in calculating the means tests. Chapter 7 and Chapter 13 filers, except for a few exceptions, are required to fill out the means test.
In a Hurry? Dial +18-503-850-342 Now!What Does the Means Test Mean?
In October of 2005, the means test was implemented in the bankruptcy code to establish objective criteria for defining who can file for Chapter 7 and Chapter 13 bankruptcy. That is only for people with mostly consumer debt.
The means testing in Chapter 7 is easy to fill out. The test looks at your family income and compares it to other families the same size as your family in your state, and it sees if your income falls below the median for your state. If your income is below, then you “pass the means test,” and will consequently file Chapter 7 bankruptcy. If the debtor earns more than the median income, there will be an additional consideration to determine the debtor’s ability to pay a Chapter 13 bankruptcy plan.
Determining the Debtor’s Disposable Income
This includes adding actual and usual expenses to their past average income. If the household income of the debtor is above the median, it is presumed that a Chapter 7 filing would be abusive and not appropriate. The debtor can rebut the presumption of an abusive Chapter 7 filing, however. Your income for a means test purpose is the money you earned during the six months leading up to the date you filed for bankruptcy. You must look at your income during the last six months, any income, except Social Security programs. Income, for instance, addresses unemployment and work wages and pensions, and passive income.
A Current Monthly Income and Means Test
This will be utilized to compute your current monthly income (CMI). This is comprehensive household income. If you were married when filing Chapter 7 as a sole individual, your spouse’s income would be counted in CMI. Our bankruptcy lawyers will need to account for family income for the last six months before filing. The look-back period also carries this name. If you file on May 10, the look-back would be all of the income that you have earned from April to November last year. The qualifying income for this time is tallied up and divided by 6 to compute your CMI.
Household income is the money available to pay most but not all of your typical household bills. The debtor’s wage is the first form of income that is used in this calculation. Business or self-employment income would also be included. Contributions, like a roommate or family member paying an electric bill, are part of the household income. Child support and alimony are considered household income. Rent, interest, dividends, and royalties are all incomes that you will have to report as household income.
In a Hurry? Dial +18-503-850-342 Now!When to File for Bankruptcy and How to Calculate Your Means Test?
The calculation of the means test significantly impacts bankruptcy. The means test will determine whether a person is eligible for Chapter 7 bankruptcy or how much money a person must contribute to their unsecured creditors under Chapter 13. Your timing in bankruptcy could impact how the means test will impact your case.
To figure out your CMI, for instance, you will add your six-month home income and divide it by six. This is supposed to be a good approximation, but it will not always be precise. Your CMI would be higher if you got a holiday bonus. This extra income might make an individual ineligible for Chapter 7 bankruptcy or force a Chapter 13 borrower to pay back more funds than they possess. A holiday bonus may be able to be exempted from the means test calculation by waiting to file your case. To wait four or five months may be the difference between filing Chapter 7 and having to file Chapter 13 for some debtors.
The Means Test in Chapter 7
The means test is a great guideline for most debtors as to whether or not they qualify to file Chapter 7 bankruptcy. The means testing in Chapter 7 will also dictate how much is paid back to unsecured creditors by debtors who do not qualify.
The debtor’s available monthly income after the performance of the means test is his or her disposable monthly income. DMI is computed by taking the debtor’s income and subtracting certain expenses and deductibles that are allowed. Among the expenses and deductions allowed are mortgage payments, health insurance, and taxes on employment. Observe that the expenses and deductions mentioned are not necessarily a debtor’s actual expenses.
Other Costs to Be Included in a Means Test
The means test is generally met by a debtor based upon his income compared to the number of members in his household. A debtor with income higher than the median income may be eligible for Chapter 7 bankruptcy or decrease his payment to unsecured creditors under Chapter 13 on the basis of certain expenses.
Tax Debt
A debtor can subtract his or her tax obligations from the income he or she earns. The payroll tax deduction can be enough to qualify under the means test in most instances.
Secured Debts
IRS standard auto and living expenses are applied to figure out your deductions. If your home payment or your vehicle payment is more than the standard deduction, then you can deduct that. You are means-tested on the payments that you will be making within the next sixty months. The deductible would be less than the payment per month if you have another two years left on your loan.
Involuntary Employment Expenses
Some employments entail mandatory deductions such as union dues, pension, or uniform cleaning expenses. These expenses can be deducted.
Health Care Expenses
You can deduct health care expenses that exceed the IRS standard limit if they are not covered by your insurance.
Routine Charitable Contributions
Congress authorized charitable contributions when it enacted the means test. You may deduct charitable contributions if you’ve already given them, such as tithing to your church. The debtor will probably be required to show the donations were habitual and ongoing.
The means test permits you to add expenses required to keep a person in good health or to keep the good health of their family. You’ll have to make and justify the circumstances under which you expended the additional money if you’re taking this deduction.
Bottom Line!
The bankruptcy filing process is complex. Most of the time, decisions made before the time the case is filed in bankruptcy will make the case a success or failure. In filing for a Chapter 7 or a Chapter 13, means testing in Chapter 7 will be a key consideration.
Our seasoned lawyers at Bruner Wright PA will examine your household income to ensure that the means test properly portrays your situation. Contact our law firm now to talk about your household income and other elements of bankruptcy.
In a Hurry? Dial +18-503-850-342 Now!