How to pass the "means test"

Here at Shenwick & Associates, we've written extensively about the "means test," which is a complex calculation that debtors must pass to qualify for relief under chapter 7 of the Bankruptcy Code if they're over the median income for their state and household size.

Since the means test was implemented as a result of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, we've filed hundreds of Chapter 7 cases, and usually manage to vault potential debtors over the hurdle of the means test. Here are a few of our tips and strategies on how to pass the means test:

1. Determine if a majority of a debtor's debt is non–consumer/business debt. If it is, they are exempt from the means test.

2. Make sure that all of your expenses are listed: 

• Taxes are deductible from the means test–includes FICA, Social Security, federal, state and local income taxes. These can add up for most debtors, and has made the margin of difference between passing and failing in many cases.

• Involuntary deductions from wages, such as mandatory retirement plans, union dues, uniform costs, and work shoes, but not voluntary 401(k) contributions or loan repayments. 

• Term life insurance, health insurance and disability insurance.

• Payments on secured claims (for mortgage, car loans, etc.) coming due in the 60 months following filing, as long as the debtor is keeping the collateral. 

• Continuing charitable contributions, up to 15% of gross income.

• Child care expenses for babysitting, nursery school, daycare and preschool. 

• Out of pocket health care expenses, to the extent they exceed the national standards amount of $54/month per household member under 65 and $130/month per household member 65 or over.

3. Add other members to the household to increase household size. Bring the kids back home!

4. If possible, reduce your income and your spouse's income for six months (the lookback period for the means test). 

5. Make sure your expenses from a business or rental property are fully listed to minimize your net income. In one case, a client who was providing independent transportation services failed to listed his expenses. Once we listed those and deducted them from his gross income, he passed the means test.

6. If you have a spouse, make sure that you're deducting any part of your spouse's income not used for the household expenses of you or your dependents (i.e. for your spouse's tax debts or support of people other than you or your dependents).

If you have questions about your unique financial situation and whether you might be eligible to file Chapter 7 bankruptcy, please contact Jim Shenwick.