The Means Test

The “Means” Test

The "Means" TestThe Means Test: The biggest misconception about the 2005 bankruptcy law changes is that people who make more than the state median income no longer qualify for bankruptcy. This is not true. Above median debtors are now required to complete the “Means Test” to see if the formula indicates that they might have discretionary income available to repay some or all of their debts in a Chapter 13 bankruptcy case. Many above median debtors still qualify for Chapter 7 bankruptcy, and those who don´t may have other options, including Chapter 13 bankruptcy, that will protect them from their creditors. I specialize in getting people whose income is greater than the means test approved for a Chapter 7.


The “new” bankruptcy law imposes heavy burdens on bankrupt debtors that were not required under the old law. One of the most burdensome of the 2005 changes in the is the income and expense test called the “Means Test”, which attempts to try to standardize bankruptcy law. The Means Test was added because the creditors convinced Congress that many people were filing Chapter 7 bankruptcy even thought they had the means to repay some or all of their debts, and they wanted a formula to help push those individuals into Chapter 13.

Many studies showed that the creditors´ studies were incorrect; there weren´t the numbers of people were “getting away” with filing Chapter 7 when they should be in Chapter 13, but Congress bought the creditors´ concerns hook, line, and sinker. Basically, the creditors (the banking industry) refused to accept any blame for creating the credit problem by giving out easy, simple credit and then changing the terms of the contract (read–charge unreasonably high interest rates) to where people could not afford to make their payments and instead got Congress to try to force the consumer to pay them more money instead of filing for bankruptcy.

Regardless, we are stuck with this bad test, and individuals who want to file for bankruptcy and whose household income is more than their state´s median income will have to apply the formula under the Means Test as part of the process to see if they can file Chapter 7. Just because household income is above the median, it doesn´t mean you can´t file for Chapter 7 bankruptcy but having to take the means test does make the paperwork more cumbersome. I specialize in getting people whose income is greater than the means test approved for a Chapter 7.

My personal experience with the Means Test has been that the Means Test has made bankruptcy more difficult on lower and middle class client´s and gives absurd results for many people. I have not seen high earner debtors forced into Chapter 13 who I wouldn´t have recommended file for Chapter 13 under the “old” law. Determining how to calculate the income to use in the Means Test as well as what expenses are allowed to be deducted is confusing for even the most experienced bankruptcy lawyers, and I believe it places an unnecessary burden on many innocent debtors. Since the results of the means test can be bazaar, I find this requirement to be ridiculous. My belief is that anyone who could/would abuse the system under the old law, can do so under the new law, but honest and hardworking debtors are being forced to bear a much higher and unnecessary burden to claim much needed relief under the bankruptcy laws.

Under the “old” law, the Bankruptcy Court reviewed debtors’ actual income and expenses to see if they could afford to repay their debts. The Means Test formula is based upon IRS collection standards, which may not leave families with enough to realistically live on. It doesn’t seem to reflect true needs of many families, and doesn’t take into account actual spending upon certain necessities such as gasoline or car maintenance. It certainly doesn’t take into account rapidly increasing gas or food prices.

If courts impose a strict reading of the means test, it may force people to give up their homes, cars or other all in an effort to force people into Chapter 13 bankruptcy to pay back credit cards a few more dollars. If the test isn’t passed, attorneys work with clients to help them through the bankruptcy system. Passing or failing this test may depend on how well your attorney understands all the factors and nuances involved with the test. Ultimately what I try to achieve with every client is making sure that people who really do not have the means to repay their debts get past the means test and are given as much relief as the law allows.

“Passing” the test means that you are presumed to not be able to pay your debts,. But pass or fail, the Court has some discretion in who can or can’t file for bankruptcy. People below the median income won’t have to take the means test, but have other requirements under the bankruptcy laws to consider. The old law required people who could afford to make payments to file a Chapter 13 and that didn’t change. The “new” law was supposed to force people who can afford to make payments file Chapter 13, but it makes people use a government imposed formula to calculate what they make and what they spend, and it since the law changed, bankruptcy lawyers find that the Means Test is often unrealistic, inaccurate and unreliable.

The Means Test uses artificial numbers in the calculations, and is complicated to apply. The test may not reflect reality and may show leftover income where there really is none. It may includes funds and income from people living with the debtor who have no obligation towards the debts, and it might include funds that aren’t income at all.

How It Works-A Brief Synopsis

The means test was added to the Bankruptcy Code to create objective standards for determining which individuals are “worthy” of relief in Chapter 7. It applies only to individuals and only those individuals whose debt is primarily consumer debt.

The means test is calculated comparing the debtor’s average income for the past six months (current monthly income), annualized, to the median income for households of the same size in the debtor’s state of residence. If the debtor’s income is less than or equal to the state median income, the debtor “passes” the means test and may file Chapter 7. The median annual income for San Diego County for a single person is $48,009.00. For a married couple it is $62,970.00.

If the debtor’s income exceeds state median income, a further analysis is performed, looking at the debtor’s calculated ability to fund a Chapter 13 plan. The debtor’s disposable income is calculated applying a mix of actual and standardized expenses to the debtor’s previous average income!

If the debtor can pay $10,950 in five years or as little as $182.50/month to creditors, a presumption arises that a Chapter 7 filing is “abusive”.

The presumption of abuse may be rebutted by the debtor by presenting facts and circumstances not provided for in the prescribed test. One obvious “special circumstance” might be that the debtor is now unemployed and doesn’t really have the ability to pay that the artificial test suggests. Other “special circumstances” can include the payment of debts that are not dischargeable or included under the specific deductions in the means test, i.e. student loans for example.

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