The Means Test
The biggest change to bankruptcy law in 2005 was Form B-22, otherwise known as the Means Test. This test helps
determine “Disposable Income”. Disposable Income is an important concept in filing bankruptcy. It simply
determines whether an individual has any money remaining in their budget after paying all necessary living
expenses. If there is money left over (disposable income), then the individual must file a reorganization (probably
Chapter 13) to pay back creditors. If there is no disposable income, then they are qualified to file a
Chapter 7 and receive a discharge without paying creditors back.
Until October 17, 2005, disposable income was determined very simply. A Debtor’s average monthly
expenses were deducted from their average monthly income. If there was anything left over, there was
disposable income; if not, there was none.
Apparently, Congress felt this was too simple and was allowing too many people to file Chapter 7. The Means
Test was designed to force more Debtors into a reorganization. It has accomplished that with much
complication and unfair results.Recently, in the In Re Nowlin decision, the Fifth Circuit Court of Appeals has brought into question the full effect of the Means Test in Chapter 13. This decision may lessen the bad effects of this horrible test in a Chapter 13 case. Until there are more cases explaining how the Nowlin case affects the application of the Means Test, we still have to deal with it.
To fully explain the working and effects of the Means Test would take a book. A simple overview follows.
First Step. Determine the last six months average gross income from all sources, including bonuses and overtime.
The unfair aspect of this step occurs when someone, through job disruption or illness, is no longer earning that
average. Whether or not the income average will be earned in the future is not taken into account at this stage.
Compare the average income to the median income for a family of your size in your county. See the link below for state median standards.
If the average is at or below the median income, the Debtor passes the Means Test and may file either a
Chapter 7 or Chapter 13. If the income is more than the median, proceed to Step Two.
Step Two. Subtract from this average income not the Debtor’s ACTUAL monthly expenses but the Internal
Revenue Service guidelines for what they think the expenses OUGHT to be. This is what catches most
people. The IRS guidelines discount many of what are typically considered necessary living expenses. See link
The Debtor does receive a deduction for house payments and cars, but even then not always the full deduction. For instance, if a Debtor has a monthly car payment of $600 on a balance of $12,000, they only receive a Means Test deduction for $200. The deduction is figured on the 60 months of a Chapter 13 Plan rather than the 20 months remaining on the loan.
Another issue is the repayment of 401k loans. Although repayment is allowed in bankruptcy, they are not allowed
as a deduction on the Chapter 7 Means Test unless they are “mandatory” ( this means they are only allowed if you will be fired for not paying them). There are many other quirks to the test. Eventually, a disposable income is determined.
Step Three. If the disposable income exceeds $110, the Debtor must file a Chapter 7; absent very compelling
extenuating circumstances. If a Chapter 13 is filed, the disposable income figure is used to determine not how
much is paid to the Chapter 13 Trustee, but rather how much is paid to unsecured creditors without priority
(credit cards and other bills without collateral). For instance, let’s take a case that needs $1000 per month to
pay the mortgage, cars, and Chapter 13 Trustee fees. A disposable income of $300 means that over and above any money needed to pay car loans, mortgage payments and taxes, unsecured creditors must be paid $300 x 60 months = $18,000. In other words, the Trustee payment must be at least $1300 rather than $1000.
The Means Test is complex and fact-intensive. To prepare it correctly requires provable income and expense
numbers; and the knowledge and experience of a qualified attorney.