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Bankruptcy Means Testing (formal)

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If you are over the median income, you are subject to formal means testing with one exception. That exception is if you hope to file chapter 7 bankruptcy and your debts are primarily business debts. The determination of the business debt exception must be made by an attorney - for example self-employed people often forget to include the amount owed on their home when trying to compute this exception themselves.


Formal means testing is a rigorous and laborious process if done by hand. Luckily we have software that helps us. Unfortunately, means test calculators can be found all over the internet. As a lay person, if you try to use one of these means test calculators, beware: 100% of the time that we’ve met with someone who has done their own means test, something about the process was either done incorrectly or analyzed incorrectly. It’s like using WebMD to make a diagnosis of something exceptionally important without actually checking with a doctor.


Formal means testing involves taking that annual number we determined in the gross income stage and dividing it by 12. The household is then entitled to a series of deductions. Some of these deductions are based on real life, such as what you actually spend on healthcare, your actual tax obligations, reasonable amounts for life insurance and many more. The problem with means testing is that there are a bunch of deductions based on what the IRS thinks is a reasonable expense for a particular part of a family’s budget. You can find these numbers here: (adjusted every 6 months or so).


The problem with the IRS numbers is that they often do not reflect reality so keep in mind that these numbers can adjust up or down over time. One great example is if you rent. Presently, if you are a household of 1 living in Houston, the IRS thinks that $786 is the most you should be spending on rent ($923 if you are a household of 2, and so on). If you spend $1200 on rent, too bad, you only get a deduction of $786. Yet if you are buying a home and your mortgage including taxes, insurance and homeowners dues if any, is $2,000 per month, you get to deduct $2,000 from your gross income.


Once all of the deductions are taken, you are left with a number. That number means different things depending on which chapter you hope to file.


In chapter 7 bankruptcy, If that number is $99.99 or less, it means you can file without the presumption of abuse applying (will need a page for what presumption of abuse is). This is a good thing. If that number is $166.67 or higher, and you try to file chapter 7, the presumption of abuse will apply and you probably will not be able to successfully file a chapter 7.


In a chapter 13 bankruptcy, that number is multiplied by 60 and it usually sets a minimum that you have to pay to your unsecured creditors.

Summary

  • Means test analysis done by a lay person is very similar to diagnosing an illness without going to a doctor
  • The means test analysis plays a significant role in numerous aspects of a bankruptcy filing



  • For more information on bankruptcy, read our guide:

    The Bankruptcy Guide



    Part 1 - How to File for Bankruptcy'
    Part 2 - Means Testing, Median Income and 'Safe Harbor'
    Part 3 - Formal Means Testing
    Part 4 - Bankruptcy Pre-filing
    Part 5 - Post-filing - set date for meeting of creditors
    Part 6 - I survived the creditors meeting, am I finished?
    Part 7 - Now that I’ve received my discharge, what do I do?

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