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The Means Test

Guidance from an Experienced Galveston County Bankruptcy Lawyer

This test helps determine “disposable income,” 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.

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The Means Test: An Overview

To fully explain the working and effects of the Means Test would take a book. A simple overview follows.

Step One:

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.

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 the next step.

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.

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 as well as the knowledge and experience of a qualified Galveston County bankruptcy attorney.

Contact John E. Smith & Associates at (281) 954-3161 today.

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