Thursday, August 16, 2012

The Means Test

Most people who file for bankruptcy in the United States have two choices: Chapter 7 or Chapter 13 Bankruptcy (only the very wealthy could file under Chapter 11). Under the old rules, you were allowed the choice of whether to choose Chapter 7 or 13 bankruptcy; however, that choice is now largely made for you by the new rules. However, there are some cases in which you fall under the income limits under which you would be classed as a Chapter 7 filer, and still be able to file for Chapter 7 by passing a legal test called the Bankruptcy Means Test.
The Means Test
The Bankruptcy Means Test must be taken by those with a monthly income above the family median for your state and size of family who wish to file under Chapter 7 Bankruptcy rather than Chapter 13 under the Bankruptcy laws enacted in 2005. The test requires that you:
- Calculate your current monthly income
- Subtract allowed IRS expenses
- Subtract secured and priority debt payments required of you to determine your monthly disposable income
- Determine whether your disposable monthly income exceeds $182.50 per month, or exceeds $110 per month but is enough to pay more than 25% of your non-secured, non-priority debts within five years
If your monthly disposable income is less than $110, you automatically pass the Means test, while if it is more than $182.50, you automatically fail. However, if your disposable monthly income is between these values but cannot pay off one quarter of your non-secured, non-priority debts within the required five years, you still pass.
Taking the Means Test
Below we outline the requirements of the Means test. To avoid the hassle of the paperwork and manual calculations, you can use an online means test calculator.
Step 1: Allowable IRS Expenses
The first step is to subtract the expenses allowed by the IRS from your monthly income. These include:
- Food, clothing, housekeeping supplies, personal care, and miscellaneous expenses for your family size. For this category use the figures published by the IRS for a family of your size; you can deduct an additional 5% for food and clothing if you can document that your required expenses exceed the IRS amounts.
- Transportation. Again, use the regional IRS figures. Transportation costs are divided into the categories of general transportation expenses (car maintenance and public transportation costs, etc) and ownership expenses.
- Housing and Utilities. Use local housing and utility expense standards published by the IRS for your area. If your actual energy costs exceed the IRS figures, you may use your actual figures.
- Domestic violence. Enter any expenses reasonably needed to maintain the safety of your family and yourself from domestic violence.
- Dependant care. Enter any reasonable expenses needed to care for an elderly, disabled, or chronically ill member of your family.
- Education. A deduction of up to $1650 per year is allowed per child for attendance at a private or public elementary or secondary school, as long as it is a reasonable figure and is not already covered by IRS expense guidelines.
- Taxes. This is the total average tax expense you actually incur for all taxes at the federal, state, and local level, not including real estate and sales taxes.
- Mandatory payroll deductions. Enter here the average monthly payroll deductions required for your employment, not including discretionary expenses such as 401(k) contributions.
- Insurance. Enter the average monthly insurance premiums for term life, dental, vision, and other forms of insurance not deducted elsewhere on the form.
- Court-ordered payments. Enter the total amount you are required to pay per month pursuant to a court order.
- Charitable donations. Enter the total amount you donate per month to charity.
- Child care. Enter the average monthly actual expenses for child care, not including primary and secondary education costs.
- Health care. Enter your average monthly health care expenses not covered by insurance or a health savings account.
- Communications. Enter here the average monthly totals you actually pay for internet services, cell phones, and special telephone services required for the welfare of you or your dependents.
Step 2: Calculate You Projected Monthly Disposable Income
If your total monthly income after deducting the expenses outlined above is less than $110, you need not proceed any further; you have already passed the means test. If your income is $110 or more after these deductions, the next step is to figure out how much disposable income you have left after the expenses outlined above plus priority and secured debts to pay off your remaining non-priority, unsecured debts. If you would be able to pay off 25% of these unsecured, non-priority debts within five years. The purpose of these calculations is to determine whether you could feasibly complete a Chapter 13 repayment plan.

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