Practical Bankruptcy: Passing the Income Side of the “Means Test” to Qualify for Chapter 7

The easiest way to pass the “means test” is to have no more than median income. Here’s how it works.

 

The Means Test and the “Presumption of Abuse”

“Abuse” is a loaded term, but it has a very special meaning in the bankruptcy phrase “presumption of abuse.” This phrase comes from the idea that only people who truly need a Chapter 7 “straight bankruptcy” should be allowed to file one. Others supposedly should either not be in bankruptcy at all or should be in a Chapter 13 case paying all they can afford to their creditors during a three-to-five-year period. If a person files a Chapter 7 case and has too much “disposable income,” the case is “presumed to be an abuse of Chapter 7”.

Your attorney finds out if you have too much “disposable income” by going through an astonishingly complicated income and expenses calculation. But this calculation can be avoided altogether, and you can pass the means test easily, if your income is no higher than a certain threshold. That threshold is the “median income” for your size family in your state. If you have no higher income than that, you pass the means test without going through the expenses side of the test, and so without having to determine your disposable income.

This income side of the means test is much more straightforward than the expenses side, but it has its own oddities. It looks only at money you received during precisely the six full calendar months before your Chapter 7 case is filed. All money received during this six-month period from virtually all sources is counted, not just income from employment or taxable income, although any Social Security benefits are excluded. Multiply that 6-month amount by 2 to get the annualized amount of income.

This particular way of determining income means that during that six-month period any irregular chunk of money you receive, or any gap in money usually received, can artificially inflate or deflate your income for the means test. That could push you above or below the median income amount applicable to you. So purposely delaying or hurrying the filing of your case can result in you passing or not passing the means test.

Here’s an illustration of this.

Our Example

Stephanie is divorced, with full custody of a pre-teen son. She has worked for the same employer for the last several years, and is paid on a straight salary. During the last year she has been paid $4,000 per month in gross pay, split between the 1st and 15th of the month.

She received court-ordered child support of $500 per month from her ex-husband very irregularly during 2011 and 2012 because he said he was not working steadily, so he fell $5,000 behind. But after Stephanie got frustrated with this and turned the problem over to the state support enforcement agency in late 2012, it found and garnished his savings account and Stephanie received $5,000 on March 1, 2013. She has been receiving the regular $500 support payment on the 1st day of every month since then.

Notwithstanding this additional income, Stephanie is by now far behind on many debts, and has just been sued by two collection agencies. So she is considering filing bankruptcy. She hopes to get a fresh financial start through Chapter 7, in part because she has not saved a single dollar for her son’s college education and hopes to begin doing so as soon and as much as possible.

Applying the Income Side of the Means Test

The current median income for a two-person family in her state is $55,050. She was hoping to file her Chapter 7 case during September 2013 to stop the two collection lawsuits against her. If she files anytime during this month, her 6-month full calendar month period for calculating her income for the means test is March 1 through August 31, 2013. During that period she received:

12 bimonthly paychecks of $2,000 each = $24,000

+ 5 monthly support payments (April 1-August 1) of $500 each = $2,500

+ 1 support arrearage payment (on March 1) = $5,000

= Total 6-month income for means test purposes = $31,500

Multiplying $31,500 by 2 results in an annualized income of $63,000, well above the applicable $55,050 median income.

However, if Stephanie is able to delay filing her Chapter 7 case only slightly until October 1, then the 6-month income period shifts later by on month, to the period from April 1 through September 30, the large support arrearage payment of March 1 is no longer part of the income calculation. Her 6-month income is now:

12 bimonthly paychecks of $2,000 each = $24,000

+ 6 monthly support payments (April 1-September 1) of $500 each = $3,000

= Total 6-month income for means test purposes = $27,000

Multiplying $27,000 by 2 results in an annualized income of $54,000, now below the applicable $55,050 median income.

The Result

If Stephanie’s Chapter 7 case is filed during September 2013, she may or may not pass the means test. She and her attorney would need to complete the expenses side of the test to find out whether her disposable income would be high enough to make her case “presumed to be an abuse of Chapter 7.”

However, Stephanie’s attorney can either determine that the two pending collection lawsuits would not be turning into judgments by October 1, or could stop that from happening. Then by filing Stephanie’s Chapter 7 case on October 1 or later that month her income is less than median income, so she passes the means test. Her case is not “presumed to be an abuse of Chapter 7” and she qualifies for Chapter 7. Barring some unusual challenges to her case, she would very likely meet her goal of a fast fresh financial start. 

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