A bankruptcy discharge is one of the most sought-after tools to tackle debt. And this is no brainer since it helps to forgive debt if you’re filing for a bankruptcy discharge.
To avoid abuse of the tool, the government created an ‘income test,’ which is more popularly called the ‘Means Test’ when the bankruptcy laws were crafted in 2005.
If you pass the Means Test, it may qualify you to be eligible for a bankruptcy discharge under Chapter 7 bankruptcy, an often lower-cost debt relief option.
Since bankruptcy Means Test is important, let’s discuss what it is, and how you can pass it.
What is the Bankruptcy Means Test?
The Means Test can summarily be defined as a bankruptcy form you’ll need to complete and file before a bankruptcy court. In the form, you’re expected to calculate your average monthly income and multiply the sum by 12 to get your average annual income.
Means Test is carried out in relation to your household. As such, even in an instance where your spouse isn’t filing for a bankruptcy discharge, their income still has to be included in the Means Test calculator. You can take a Means Test calculator to help you estimate the Chapter 7 Means Test qualification.
When calculating your Means Test, the reason why you’re asked to use your household income is due to the fact that the test only compares your average household income to that of your resident state. The average household income lies in the Census Bureau data. So, what does this test really do? It checks if your household’s average annual income exceeds or is below your state’s average household income for houses with the same number of people.
Where to Get Forms for Chapter 7 Means Test
Visit the United States Courts Website to download a copy of the Means Test bankruptcy form. However, you need to prepare lots of data before applying for a bankruptcy discharge. For example, it’s important that you have Census Bureau data, administrative expenses multipliers, and IRS Data to complete all calculations needed by the Means Test.
How to Calculate Your Current Monthly Income for Means Test
It’s important that you have a proper understanding of how to calculate your current monthly income to know your Means Test. The Means Test data is often updated every six months with the most recent being for bankruptcy cases filed on or after May 15, 2021. The current monthly income is the income you get from your income sources at least six months prior to filing for a bankruptcy discharge. Assuming you filed for a bankruptcy discharge in the month of April, then your current monthly income will be calculated from what you earned during the last six months (October 1 through March 31). You can use the calculator below to know your exact monthly income.
Keep in mind, it’s important that you report your household income, thus, you should make sure you include the income of your spouse even if you’re not filing for a bankruptcy discharge. Some income that you’re mandated to include in your mean test are:
- Salaries
- Overtime
- Wages
- Net Rental Income
- Bonuses
- Unemployment compensations
- Annuity Payments
- Workers’ Compensation Benefits
- Net Income from Operating a Business
- Pensions and Retirement Income
- Royalties, Interest, and Dividends
- Alimony and Child Support
- 1099 Income
- Commissions
- Unemployment Compensation
Your monthly income as explained earlier is the sum of all your income six months prior to the filing for a bankruptcy discharge divided by six. It’s also worthy of note that when calculating this, you’ll use gross income before deductions, except for business income and rental income.
It’s not necessary that you use payments obtained under the social security act (Social security investment, SSI, and SSDI) to calculate your Means Test. However, these incomes must be included when filing other bankruptcy forms, including Schedule I.
Schedule I is a snapshot of your monthly income. If your disposable income is significant, you may not be issued a Chapter 7 bankruptcy discharge, even in an instance where you passed the Means Test.
Do you find the requirements and processes complicated? That’s when you need the expert advice and help of a bankruptcy attorney. Bankruptcy Law Center and other similar law firms can help people deal with their bankruptcy cases. An experienced lawyer who’s knowledgeable in such types of cases can help assess your situation, think of the best legal solution, and get you out of debt to improve your financial situation.
Can I Get Below the Means Test with some Expenses If My Income Exceeds the Means Test
You have to calculate your current monthly income, multiplied by 12, to get your average annual income. This average annual income is compared with your state’s average annual income. You pass the Means Test when your average annual income is below the state’s median value for average annual income; this may qualify you for a bankruptcy discharge. But in an instance where your average annual income is above the state’s average, then you’ll be required to take a second test to identify your deductible expenses.
If you need help calculating your median expenses, I’ll advise that you use Ascend’s Chapter 7 Means Test Calculator for a more accurate result.
Summarily, if you failed the Chapter 7 Means Test, you may still be issued a bankruptcy discharge certificate, provided that you pass the second part of the test. This second part is calculated by deducting your allowable monthly expenses from your CMI. Your deductible income is the income after your expenses that you’ll need to repay your debts. However, if you have a disposable income that’s below a certain figure, you may still qualify for a Chapter 7 bankruptcy discharge.
If you do not qualify for Chapter 7 bankruptcy, you can look at alternatives such as Chapter 13 bankruptcy or debt settlement.
While these alternatives are often more expensive, many people choose these options to help achieve debt relief.
Deductible Expenses
The Means Test allows you to deduct certain expenses before calculating. Some expenses you’re allowed to deduct include:
- Income taxes
- Term life insurance premiums
- Child Care expense
- Child support and alimony payments
- Charitable contributions
- Secured debt payment for home and car
- Disability and other health insurance premiums
- Mandatory deductions, e.g., retirement plans, uniforms, and union dues.
In certain instances, you may also deduct normal living expenses. However, the bankruptcy court will mandate that you provide proof of the expense claimed in the Means Test. Additionally, you should know that not all living expenses can be deducted.
Deductible living expenses include the following:
- Clothing
- Housekeeping supplies
- Food
- Out-of-pocket health care expenses
- Transportation expense
- House and utility expense
- Personal care services and products
The expenses noted above are limited and are done according to the total number of members of a household. We’ll advise that you refer to the current national standards for the maximum amount that’s allowed for an expense.
You can also consult an experienced bankruptcy attorney to help you determine the allowable deductibles for the Chapter 7 Means Test. They know the potential deductible sources that most clients fail to determine. This essential step can help you ensure your basic expenses are covered for your peace of mind, a sense of security, and legal protection.
Can I Estimate Whether I Qualify for the Means Test?
There are numerous Means Test calculators as seen above on the internet that enables you to estimate your chances of qualifying for a Chapter 7 bankruptcy discharge. You can make use of this calculator to know whether you qualify for a discharge according to your Means Test.
You can use a Chapter 7 Means Test calculator intended for your state. This uses the individual’s gross income as a basis. The first part utilizes IRS-allowed expenses, and the second checks the individual’s actual expenses.
Conclusion
Now. you have comprehensive knowledge about the bankruptcy Means Test. Use it to your legal advantage to help you resolve your current financial situation. Don’t hesitate to consult a bankruptcy lawyer to get personalized advice and computation of your Means Test before submission to gain more successful outcomes.
