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Bankruptcy “Means Test”- What is it?

Bankruptcy Means Test calculationsAs a bankruptcy attorney in Omaha, I frequently get questions about the “Means Test” by people who have spent a considerable amount of time on the Internet.  I actually really enjoy these technical questions because we can jump right into the little nuances of the bankruptcy means test and how it works in the “real world.”  And, more importantly, how is going to work in Omaha, Nebraska and surrounding communities?

What is the bankruptcy “Means Test?”

In 2005, Congress enacted several amendments to the Bankruptcy code that are generally found at 11 U.S.C. §§ 101 through 1529.  The key statute that creates and implements the “means test” is found at 11 U.S.C. § 707(b)(2):

The United States trustee (or bankruptcy administrator, if any) shall, not later than 30 days after the date of filing a statement under paragraph (1), either file a motion to dismiss or convert under section 707(b) or file a statement setting forth the reasons the United States trustee (or the bankruptcy administrator, if any) does not consider such a motion to be appropriate, if the United States trustee (or bankruptcy administrator, if any) determines that the debtor’s case should be presumed to be an abuse under section 707(b) and the product of the debtor’s current monthly income, multiplied by 12 is not less than-

(A) in the case of a debtor in a household of 1 person, the median family income of the applicable State for 1 earner; or

(B) in the case of a debtor in a household of 2 or more individuals, the highest median family income of the applicable State for a family of the same number or fewer individuals.

Sub paragraphs (A) and (B) are really important because EACH STATE has a different standard.  In practical terms, this means that a person living in New York, City, for example, needs to make a lot more money each month to be at the same income level of someone living in Omaha, Nebraska.  In fact, each state breaks it down further by counties.  Thus, the average median income in Douglas County, Nebraska will be different than someone living in Scotts Bluffs County, Nebraska.  The bottom line is that WHERE you live may determine what type of bankruptcy you can file and, if it is a Chapter 13 bankruptcy, HOW MUCH you may need to pay back.

The source of the bankruptcy means test actually comes from the Internal Revenue Service’s collection manual with a few modifications.  The IRS uses this manual/test when determining how much a taxpayer is able to afford each month in terms of a payment plan for past due taxes.  This is also the same test employed in the Offer in Compromise program offered by the IRS.  In short, the bankruptcy means test is just a formula, of sorts, that tries to objectively determine a person’s level of ability to pay their creditors, if at all, in a bankruptcy proceeding.  Although this is not the only factor involved in determining eligibility for a Chapter 7 or Chapter 13 bankruptcy, or the amount that will need to be paid back, but it is a starting point.

Example 1:  Debtor and Bankruptcy Attorney both located in Omaha-

In this instance, the bankruptcy attorney must apply the means test data applicable to Omaha (Douglas County) because the Debtor resides here.  The following is the current annual median income levels published as of 5/1/2012:

1 person household:  $39,192

2 person household: $55,519

3 person household:  $64,700

4 person household:  $71,247

5 person household:  $78,747

6 person household:  $86,247

7 person household:  $93,747

8 person household:  $101,247

Example 2:  Debtor and Bankruptcy Attorney both located in New York City:

In this instance, the bankruptcy attorney must apply the means test data applicable to New York City because the Debtor resides there.  The following is the current annual median income levels published as of 5/1/2012:

1 person household:  $47,381

2 person household: $57,884

3 person household:  $69,066

4 person household:  $83,775

5 person household:  $91,275

6 person household:  $98,775

7 person household:  $106,275

8 person household:  $113,775

Bankruptcy Means Test little known FACTS from the perspective of a practicing bankruptcy attorney in Omaha:

  1. The bankruptcy means test is NOT the only factor that determines eligibility for bankruptcy nor the amount you may have to pay back in a Chapter 13…..it is just a preliminary test.
  2. Just because you “pass” the means test does not automatically mean you qualify for bankruptcy.
  3. Just because you “fail” the means test does not mean that you won’t qualify for bankruptcy.  Really!
  4. The means test does determine whether you will be required to pay for 36 months or 60 months in a Chapter 13 bankruptcy.
  5. The means test is still very important, especially in Chapter 7 bankruptcies but less so in Chapter 13 cases.
  6. Special circumstances are relevant in qualifying for a bankruptcy and with respect to the Means Test.  Not all circumstances have the same weight.  For example, extraordinary healthcare costs are very relevant.  Extra expenses for soccer practice are not normally important enough to qualify as a special circumstance.  Only the experience of the Bankruptcy attorney is able to guide you through these thorny issues.
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