If you have fallen behind on payments to creditors or are struggling with your finances, filing for bankruptcy may be beneficial for you. One of the mandatory steps to completing a bankruptcy filing is the Means Test. The Means Test was introduced into the bankruptcy process in 2005 as a way to limit individuals who may be entering the process with wrongful intentions. Established by Congress, the Means Test determines whether a Chapter 7 or Chapter 13 filing is appropriate for you by using information like the amount of money you earn and how many members are in your household to see how you compare to other households around you. In order to determine the median in your state and for the amount of people in your household, the United States Census Bureau has created a table. For example, a household of 3 people in California has a median income of $91,605.00. This amount will be used as a measurement for completing the Means Test. This data is updated regularly to allow for an accurate representation. Please refer HERE for the most updated version.
PART 1
The Means Test can be looked at as two sections. The goal of the first section is to see how you compare within your state. Unlike the second portion, part 1 is mandatory. In order to complete this, you must report your total income for the past 6 months. Whether or not you are currently employed or shifted between employment and unemployment during this time, you are still required to report this. The Means Test is designed to take this into account. Total income is calculated by listing all forms of monthly income you receive. This includes any payments that are received outside of your salary, including the following:
- All income received through employment, including income prior to any deductions
- All income generated through owned property and businesses after expense-related deductions have been made, including rent
- Income accumulated through interest
- Alimony, child support, and any payments required by court-order
- Unemployment, disability, workers’ compensation, and other federal aid, EXCEPT social security
From here, your annual income is calculated by multiplying your monthly income by 12. This is then used to compare your income to other households in your state with the same number of members in the household. An annual income that falls below the median level ensures that it is highly unlikely the individual filing for relief may take advantage of the bankruptcy system. The Means Test has successfully been completed, and you are not required to complete the rest of the test. You may continue with filing a Chapter 7 case or explore whether a Chapter 13 may be more beneficial to you.
PART 2
For those whose annual income falls above the median level, the second part of the test must be completed. The purpose of the second section is to determine your monthly expenses in order to calculate your monthly disposable income. Disposable income is the amount of income left over after all necessary expenses have been paid. Necessary expenses include living expenses, food, healthcare, etc. After all expenses have been deducted, and your monthly disposable income yields an amount lower than the established, it is likely that you should continue with filing a Chapter 7 bankruptcy. In other words, the Means Test does not recommend pursuing a Chapter 13 filing because it may end up doing more harm than good. If the amount is higher than the established amount, you have not successfully passed the Means Test. This means you cannot pursue a Chapter 7 filing.
The Means Test can only be completed by filling out the required paperwork. While some online sources may claim to offer a “Means Test Calculator,” these are often not an accurate measurement considering the amount of information required to complete the paperwork. Instead, it is best to complete the actual Means Test to determine whether or not you qualify for a Chapter 7 or Chapter 13 bankruptcy.
IF YOU PASS THE MEANS TEST
If you have successfully completed and passed the Means Test, this indicates that you are eligible for a Chapter 7 bankruptcy filing. You may proceed with completing your bankruptcy paperwork and file your petition with the court. After completing all necessary paperwork and credit counseling, the Court will appoint a trustee who will oversee the remainder of your case. In a Chapter 7, this includes liquidating any property that has been listed as non-exempt and using the money received to pay off creditors.
If you do pass the Means Test, you are not required to file a Chapter 7, and a Chapter 13 filing may still be in your best interest. While a Chapter 7 helps you eliminate a lot of your outstanding debts, a Chapter 13 could allow for you to keep more of your assets depending on the specific facts. Chapter 13 bankruptcy utilizes a repayment plan, scheduling when debtors must make payments to creditors. This prevents the liquidation of assets.
IF YOU DO NOT PASS THE MEANS TEST
If you do not pass the Means Test, it does not disqualify you from bankruptcy relief. Instead, it demonstrates that if you do wish to continue pursuing a bankruptcy filing, you will pursue a Chapter 13 filing as opposed to a Chapter 7. This is because you have demonstrated a high enough monthly disposable income to be able to successfully pay off debts (or at least a portion of them) through a repayment plan instead of liquidating assets. Once you have submitted your petition and paperwork for a Chapter 13 filing, a repayment plan will be established and require that payments be made to creditors throughout the next 3 to 5 years. After completing the requirements set in the plan, the Court will clear any outstanding debts and you will receive a discharge.
If you still do not feel that a Chapter 13 is your best solution, you can consider looking into other options. For example, some creditors may be willing to establish a debt settlement or management program. A debt management program provides you with the opportunity to pay off debts with reduced interest. Each month, debtors make a payment with a credit counseling agency. From here, the agency will distribute the money to the creditors, depending on how much is owed to each. This method is often used by credit card companies to ensure debtors are paying off their debts and allows for multiple credit cards to be paid off at once. A debt settlement program is often pursued if there are no other options. While creditors may lower the total amount of debt owed, you will make deposits into an account controlled by the creditor instead of directly to them. The downside to this is that it can be extremely costly and continue for several years. Additionally, you may choose to attempt the test again in the future to determine whether any changes have allowed you to qualify for a Chapter 7 filing.
IS THERE ANY WAY TO STILL PLAN FOR A CHAPTER 7 FILING?
If you have failed to pass the Means Test and are still hoping to file for Chapter 7 relief, the Court may allow for it if they deem necessary. Reasons for doing so include the following:
- You recently became unemployed
- You have remained unemployed for an extended period of time and may no longer be eligible for unemployment benefits
- Outstanding/ongoing medical bills
It is rare for the Court to allow the debtor to bypass the Means Test. However, if you are able to present evidence of these special situations, they may be able to do so and allow you to continue pursuing for relief under Chapter 7 bankruptcy.
IF I AM ALREADY PLANNING ON FILING A CHAPTER 13, DO I NEED TO COMPLETE THE MEANS TEST?
In this scenario, yes. Regardless of whether or not you intend to file a Chapter 13 bankruptcy at the onset of your filing, the Means Test is still required because it can provide the Court with information regarding your case. The amount reported for you annual income will be used to determine the length of your repayment plan. For example, if your annual income is above the median, you will receive a 5-year plan. In order to determine whether or not you must repay any unsecured creditors, the calculated disposable income is used as the determining factor. If the amount yields a negative amount, you will not be required to make payments to your unsecured creditors. If the amount yields a positive amount, you will be required to pay these creditors. Additionally, the amount yielded establishes the amount you pay creditors monthly. However, if your annual income is reported to be less than the median, you can potentially be assigned a 3-year plan, in addition to not having to make payments to any unsecured creditors and not having to complete part 2 of the means test.
MISTAKES WHILE COMPLETING THE TEST
In order to ensure a successful Means Test, is important to not make any mistakes. Some of the most common mistakes include:
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Completing the test even though it was not required
If you meet certain criteria, you may be able to bypass the Means Test altogether. For example, if you are filing for relief from business related debt, the Means Test is potentially unnecessary. Business debts are those acquired through borrowed money that was used towards a business venture. An example of a business debt is a loan acquired to help fund your new business. Additionally, you may skip the Means Test if you are a disabled military veteran. In many cases, debtors often have both business and consumer debts. If the business debts are greater than the consumer debts, then you may proceed without the Means Test.
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Incorrect number of individuals at home
In some cases, you mistakenly include members of the household who you are not financially responsible for. For example, if you live with a roommate, there may be two of you in the household but each of you is fiscally responsible for themselves. Instead of comparing your median income to that of a household with 2 individuals, you really will need to compare your median income to that of a single-person household.
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Inconsistent amounts of income listed
Your income is reported on several different documents involved in your bankruptcy filing. When reporting your income for the Means Test, you must include all income received prior to 6 months before completion. It is important to double check that these numbers are consistent and accurate in order to prevent any further delays or complications.
HOW CAN WE HELP?
When filing for bankruptcy, or even considering doing so, the Means Test plays a key role in establishing your case. Contact Sacramento Bankruptcy Lawyer today to learn more about the Means Test and what it can mean for you. By speaking with attorney Pauldeep Bains, he will use his knowledge and experience with bankruptcy filing to help you complete the Means Test. Mr. Bains will work alongside of you to ensure you that the Means Test is completed accurately and that the best avenue is pursued depending on your situation.
We help clients in the following areas: Sacramento, Elk Grove, South Sacramento, West Sacramento, Natomas, Citrus Heights, Antelope, Fair Oaks, Gold River, Rancho Cordova, Roseville, Rocklin, Lincoln, Wheatland, Yuba City, Marysville, Woodland, Davis, and Lodi.
