Bankruptcy Means Test Definition
The means test is a formula the bankruptcy court uses as a guideline to determine whether a debtor is eligible to file for Chapter 7 Bankruptcy. The test is based off of the debtor’s income and / or the debtor’s income as compared to expenses. Specific tables and data must be used to calculate the means test.
The means test formula is based off of the filer’s income level to start. Therefore, many people see the means test as simply an income limit. However, it is not that simple. There is a median income level for each state that is published each year that corresponds to the household size or family size. So really, the formula is a measure of household income, not individual income. The attached table published by the Department of Justice, shows the median income levels for each state for bankruptcies filed on or after May 1, 2016. So to find the median income for the bankruptcy means test in Michigan, simply locate the State of Michigan on the chart and the family size.
If the debtor’s household income is below the state median, they preliminarily qualify for Chapter 7 bankruptcy, subject to a budget test. If the debtor’s income is over the state median, the computation can become quite complex, but the debtor may still qualify for Chapter 7 bankruptcy.
Is the income limit for the means test before or after taxes?
The answer is that it is based on both gross and net income. The first part of the test is based on gross income of the debtor from all sources received for the 6 calendar months prior to the month in which the case is filed. So if you file in June, you would look at income from December of the prior year through May.
However, we also use net income to determine if a debtor qualifies for chapter 7 bankruptcy under the budget analysis, which must be done in every chapter 7 case. This test takes your monthly income on the date of filing and subtracts out your necessary living expenses. If you have a business or are self employed you may also deduct business expenses. If your income shows a “substantial surplus” which can vary from court to court, and your debts are primarily consumer debts (for example, credit cards used for nonbusiness items, mortgage, vehicle debt), then you likely will not qualify for a Chapter 7 Bankruptcy. You may need to consider in that situation a Chapter 13 or a Chapter 11 case. Consider that if you have non-consumer debts (for example, taxes, parts of student loan debts that are used for education and not living expenses, taxes) then any surplus in your budget may not be as significant of a factor.
There are still other objections that can be raised to a Chapter 7 case if the debtor’s income shows too much of a surplus.
Bankruptcy attorneys calculate the means test for families that do not meet the first prong of the means test by starting with the debtor’s income and subtracting expenses that may qualify under the formula, such as a mortgage payment and other monthly living expenses. They then determine if you have enough disposable income to repay your debts according to the means test formula and also perform a budget analysis. Many times a bankruptcy lawyer can help you with these calculations and the result may not be what you expected.
Remember, Chapter 7 bankruptcy means that the filer’s debts are discharged unless they are reaffirmed. Higher income individuals and couples may still file for bankruptcy, but they may have to file under Chapter 13, which is a repayment plan where the debtor is required to re-pay a portion of their debts over a 3-5 year period.
You are not alone. Many people want to know how to pass a bankruptcy means test. However, these complicated issues can even challenge attorneys that practice in the area. Consulting with an attorney to help you through this complicated process is the smart choice.
We serve clients all over the State of Michigan, Including Charlevoix County (Charlevoix, East Jordan, Elmira, Boyne City,), Otsego County (including Gaylord, Johannesburg, Elmira), Kalkaska County, Emmet County (Including Mackinaw City, Alanson, Conway, Petoskey, Walloon Lake) Cheboygan County (including Cheboygan, Indian River).