The Means Test

What is It and Why Do I Need It for My Bankruptcy?

You might have read about the Means Test if you researched bankruptcy options for getting out of debt. This bankruptcy form causes a good bit of confusion and stress for many individuals seeking bankruptcy relief. It determines whether you can file under Chapter 7, so it is an important bankruptcy form that must be completed accurately. However, what is the Means Test and why is it significant to a bankruptcy filing in New Jersey or New York.

What Is The Means Test?

The Means Test was created when Congress revised the Bankruptcy Code in 2005. Under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), debtors are now required to meet certain income requirements to qualify for a bankruptcy discharge under Chapter 7. The Means Test is the bankruptcy form used to determine if an individual meets the income requirements for filing under Chapter 7. 

Proponents of the addition of a Means Test to the Bankruptcy Code argued that it would decrease bankruptcy fraud. It was argued that one way to avoid bankruptcy fraud was to ensure individuals who could afford to repay their debts did not receive a discharge under Chapter 7. They would be required to file under Chapter 13 to repay at least a portion of their debts before receiving a bankruptcy discharge.

Those arguing against the Means Test feared that it would prevent individuals who truly needed debt relief from receiving that relief. 

Because of the media coverage and lack of knowledge of how the Means Test would impact bankruptcy filings, thousands of people rushed to file for bankruptcy relief before the new law took effect in 2005. Over a decade later, the Means Test is still a source of confusion for many individuals seeking bankruptcy relief, but it is not the deterrent to filing bankruptcy that many people feared.

How Does the Means Test Work?

The Means Test uses data from the Census Bureau to compare your income to the median family income for households of your size in New Jersey or New York. The data is updated to reflect the current data for median incomes. Therefore, you must ensure that you are using the most recent data available when completing the Means Test.

Calculating Income for the Means Test

To calculate your median income for the Means Test, use the average of all income received during the six months preceding the filing of your bankruptcy petition times 12 to arrive at a median annual income amount. 

Examples of sources of income include, but are not limited to:

  • Wages and salaries
  • Tips
  • Bonuses and commissions
  • Net income from operating a business
  • Retirement and pension income
  • Dividends, interest, and royalties
  • Net income from rental property
  • Child support and spousal support payments
  • Workers’ compensation 
  • Annuity payments
  • Unemployment compensation
  • State disability insurance

Income received under the Social Security Act, such as SSI, SSDI, and TANF, may be excluded from the Means Test income requirements, but you need to report this income to your bankruptcy attorney because it can impact your bankruptcy case in some situations.

Comparing Your Median Income to State Median Income Amounts

If your annual median income is below your state’s median income for a household of your size, you “pass” the Means Test and qualify for a bankruptcy discharge under Chapter 7. 

Why is the bankruptcy discharge important? Your bankruptcy discharge eliminates your legal liability to repay a debt. If you file a bankruptcy case and do not receive a bankruptcy discharge, you continue to owe the debts to your creditors once your bankruptcy case is closed. Therefore, it is crucial that you meet the income requirements for a Chapter 7 case before filing under Chapter 7 to qualify for a bankruptcy discharge. 

What Happens if I “Fail” the Means Test?

If your median income is above your state’s median income, you “fail” the first section of the Means Test. However, there is a second section of the test.

The second section of the Means Test measures your disposable income. Disposable income is the amount of money remaining each month after payment of allowable living expenses. Allowable expenses used to calculate disposable income for the Means Test are based on the National Standards established by the IRS. 

The IRS National Standards for Allowing Living Expenses provides the maximum amount a household should spend on certain living expenses based on the number of people living in the household. The standards are adjusted periodically to reflect current amounts. 

For example, as of May 1, 2019, a should of three people is limited to $786 per month for food. If your monthly expenses for food exceeds this amount for a family of three, you must have a valid reason for the higher amount to include it on the Means Test, such as a family member with a special diet because of an illness or health condition. There are also National Standards for clothing, other living expenses, out-of-pocket health care expenses, housing, utilities, and transportation. 

Allowable expenses are deducted from your median income to determine the amount of money you have each month to pay debts (your disposable income). Having disposable income does not necessarily mean that you do not qualify to file under Chapter 7. There is a complicated formula for determining whether the amount of disposable income is enough to require you to file a Chapter 13 repayment plan. If there is not enough money to pay a certain percentage to your unsecured creditors, you might still meet the income qualifications for a Chapter 7 case. Also, if your debts are primarily business debts, the Means Test is not applicable.

Seek Assistance from an Experienced Bankruptcy Lawyer

The Means Test can be extremely complicated to complete. A small error on the Means Test could be the difference in filing a Chapter 7 bankruptcy case that is completed in about six months or filing a five-year Chapter 13 repayment plan.

While the rules of the Means Test cannot be modified, an experienced bankruptcy attorney understands how to maximize the allowable monthly expenses to decrease disposable income as much as possible. An attorney with bankruptcy experience also understands the exceptions to the Means Test and if income may be excluded from the Means Test.

If you have questions about bankruptcy or the Means Test, contact our office to schedule a free consultation with a bankruptcy lawyer. Contact the Silverberg Law Firm by calling  New York (212) 687-7000 or in New Jersey (201) 252-7000.

New York Bankruptcy Lawyer Jay Silverberg

Our firm proudly practices bankruptcy law and is considered a debt relief agency under federal law. We help people file for bankruptcy relief under the United States Bankruptcy Code.

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