In order to be able to be eligible to file for a Chapter 7 bankruptcy a debtor needs to pass the “Means Test.” Congress created the Means Test as a way to limit the number of people who can file Chapter 7 cases. The main purpose of the Means Test is to force more individuals to file Chapter 13 cases so that they pay back at least something to creditors.
If the majority of a debtor’s total debt came from operating a business, the debtor is not required to complete the Means Test. The Means Test is quite complex and it is important to go through it with your Utah bankruptcy lawyer to understand it.
First Step (Determine Income)
The first step of the Means Test is performed by determining the debtor’s average gross monthly income for the six months prior to the filing of the Chapter 7 case. If the debtor’s income is less than the state median income based on the debtor’s household size then the debtor can typically file a Chapter 7 bankruptcy.
In computing a debtor’s income, the debtor must include income from the following sources:
- All wages, salary, tips, overtime, commissions and bonuses
- Income from the operation of a business, profession or farm income
- Interest, dividends and royalties
- Rents and real property income
- Pension and retirement income
- Alimony and family support
- Spousal contributions (if not filing jointly)
- Unemployment compensation
- Workers’ compensation
- State disability insurance
- Annuity payments
- Lump-sum payments
- Other income
Income that can be excluded from this calculation includes tax refunds, Social Security retirement benefits, Supplemental Security Income, Social Security Disability Insurance and Temporary Assistance for Needy Families.
Once this first step has been completed, if the debtor is below the median income for the debtor’s state the debtor may file a Chapter 7 case and does not need to move on to the second step. However, if the debtor’s income is above the median income for the debtor’s state, the debtor needs to move on to the second part of the Means Test. The income section of this test is often difficult to complete accurately and your Utah bankruptcy lawyer can assist the debtor with this process.
Second Step (Expenses)
If the debtor is above the median income for his or her state, the debtor will need to complete the second part of the Means Test by deducting allowable expenses. Once the debtor’s average gross monthly income has been established, the Means Test allows the debtor to deduct certain expenses. With the help of your Utah bankruptcy lawyer the debtor can learn what expenses can be deducted on this test. Some of the allowable deductions include housing, utilities, basic living expenses, taxes, health insurance premiums, transportation, alimony, child support, child care and charitable contributions. There are a number of other expenses that are also allowed. If after all of the allowed expenses are entered, the debtor has no disposable income with which to pay creditors in a Chapter 13 case, the debtor may proceed with filing a Chapter 7 case.
If the debtor has available income, the debtor is deemed to have failed the Means Test. If the debtor fails the Means Test, the debtor may still be able to file a Chapter 13 case.
There is always a chance even if the debtor passes the Means Test that the U.S. Trustee’s office may determine that the debtor has sufficient income to repay creditors in a Chapter 13 case and may file a motion to attempt to force the debtor to convert the case.