What Does it all Mean: The Means Test

The Means Test was added to the bankruptcy code with the intention to remove the excessive abuses of the bankruptcy protections. The Internal Revenue Service imposed this array of financial calculations thereby enabling the I.R.S. to establish who may or may not file for bankruptcy. The Means Test clearly dictates who may file a Chapter 7 bankruptcy and who may not.

If you fail the Means Test, you may not file a Chapter 7 bankruptcy. Failure of the Means Test in the eyes of the Internal Revenue Service means that you have the financial ability to repay your creditors. As such, a bankruptcy petition to discharge debts without repayment is denied. The test is exhaustive (8 pages of questions) and has been compared by some as being the equivalent of an I.R.S. audit. The results carry a similar sting. Many consumer groups have expressed concerns because a petitioner's previous 6 months average income decides one's financial means.

The Means Test begrudgingly resists extending accommodations for petitioners that may have realized recent drops of their monthly income. Circumstances such as a job loss and consequential acceptance of a lower paying job would work against you. Critics argue that your current income should be the basis of the calculation, rather than a 6-month average.

The Means Test considers a petitioner's current monthly income and indicates if:

1. The petitioner's current monthly income is greater than the state median income. The petitioner must have lived in the state for two years before filing for bankruptcy to use the median income for that specific state. If a petitioner fails to meet this condition, the courts will use the median income for the state in which the petitioner has lived the majority of time, for the past 180 days before filing for bankruptcy.

Listing of Median Household Income by State.

2. Measures if the potential exists for abuse of the bankruptcy protection by deciding if the total current monthly income for the next 60 months (5 years), minus all allowable monthly living expenses is:

      a. Greater than $10,000 or,

      b. 25% of the petitioner's nonpriority unsecured debt. The minimum dollar value of

      this calculation is $6,000.

If the income analysis shows an amount less than $10,000 when factored over 5 years or greater than 25% of nonpriority unsecured debt (subject to the $6,000 minimum), the presumption of abuse is removed.

There are justified special circumstances allowing adjustments of the allowable current monthly gross and net income figures. All bankruptcy petitions failing to meet the income requirements stipulated by the Means Test will, with the petitioner's consent, be filed as a Chapter 13 bankruptcy, or be dismissed should the petitioner decide against a Chapter 13 bankruptcy.

<<Part 2: Types of Bankruptcy | Part 4: Credit Counseling and The IRS>>

If you are thinking about filing for bankruptcy, you should consult with a bankruptcy attorney in your area to discuss your options.