Means Test

Chapter 7 Means Test

As a bankruptcy attorney in Tacoma and throughout Washington, one of the first issues I want to analyze when consulting a potential client is whether the person qualifies for a Chapter 7 bankruptcy case under the “means test calculation”, or whether their option is a Chapter 13 bankruptcy wage earner plan.

There are two basic questions: First, what is the household size? Second, what is the gross income for the previous six months multiplied by 2? Usually the household size is easy to determine, but issues can arise. Should children who reside part-time be considered as part of the household? How about college students who reside at the home part-time? Who is considered dependent? There is case law that discusses these issues but ultimately it depends upon the particular circumstances, so that’s why it is crucial to consult with a Tacoma bankruptcy attorney like myself for your specific needs.

The period for determining income for the means test is the previous six months, so if you are filing in July the calculations would be income received from January 1 to June 30th. All income is considered in the calculation unless it can be specifically excluded. Social security is excluded. As of 2019 under the HAVEN Act, Veteran Administration benefits are excluded. However, retirement income, business income, state unemployment benefits, ongoing contributions, bonuses and other income are included.

Even if you are above the median income, it is possible that you still qualify for a chapter 7 bankruptcy. Relevant issues would be whether you have a mortgage or other secured debt or priority tax debt. Actual reasonable and necessary expenses are also relevant, as are payroll deductions such as union dues, medical insurance and other deductions. For “above median income” debtors whose debts are primarily consumer debts (as opposed to business debts), it is necessary to determine their disposable income under a formula and deduct allowed expenses, and then multiply by 60 months. The relevant federal statute is 11 U.S.C. § 707(b)(2). Chapter 7 uses the official forms 122A-1 and 122A-2. Even if a debtor “passes” the means test, it is possible that the US Trustee’s office will seek to dismiss the chapter 7 case under the “totality of the circumstances” under 11 U.S.C § 707(b)(3).

Chapter 13 Means Test

The Chapter 13 means test is not identical but follows a similar formula. The forms are B122C-1 and B122C-2. The first question is to determine whether you are above or below median income, which is calculated by determining the household size and gross income for the previous six months multiplied by two. If you are above median income, it is a mandatory five-year payment plan.

If you are below median income, you qualify for a chapter 13 discharge after satisfying a three-year commitment period (meaning that you made plan payments for three years). It is possible to propose a plan longer than three years when you are in a three-year commitment period. There are several reasons why you may need additional time. For instance, in a “home-saver” chapter 13 case, you may need additional time to catch up on missed mortgage payments and the ongoing mortgage. Or perhaps due to the value of your assets and not being able to exempt all those assets, you may need more than three years to pay the “liquidation value” of non-exempt assets.

If you are above median income, then you are subject to a five-year commitment period to obtain an order of discharge, and form B112C-2 will need to be filed. The purpose of the form is to calculate the “monthly disposable income”. As an example, if after following the formula you have $100 of monthly disposable income, it will be necessary to propose a payment plan that pays “nonpriority unsecured claims” a total of $6,000, which is calculated by the monthly disposable income ($100 in this example) multiplied by 60 months.

It is possible to propose a different amount if you can establish a substantial change of circumstances from the means test formula. This is permitted based upon a US Supreme Court case called Lanning. Another way of saying this is that you are seeking “Lanning relief” in calculating the “current monthly income, or CMI”. As an example, the debtor files a bankruptcy in July. The relevant months in calculating the income are January 1 to June 30. If on June 1 the debtor changed jobs and had a reduction in income, the formula will provide a “monthly disposable income” which the debtor can no longer afford to pay. The plan should include a request for Lanning relief, which is a provision asking to pay less than the “monthly disposable income” calculated by the formula.

The means test calculation is a critical part of any bankruptcy case. I highly recommend that anyone considering filing for bankruptcy to consult with a Tacoma bankruptcy attorney like myself to conduct these calculations. As part of a free consultation, I will calculate and analyze the means test calculations.