Chapter 7 Means Test

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In order to qualify for a Chapter 7 bankruptcy, a Chapter 7 Statement of Currently Monthly Income and Means Test Calculation must be completed and submitted to the Court. This is essentially a three step mathematical calculation that is designed to ensure that Chapter 7 debtors are not “abusing” the chapter 7 system. If a Chapter 7 debtor qualifies at any step in the three step calculation, then any further calculations are not required.

Qualification for chapter 7 is not as difficult as it sounds, and the formula works as follows:

• Step 1 – Median Income Test
• Step 2 -  Means Test Calculation
• Step 3 – Multiply non-priority, unsecured debt by 25%

Step 1 – Median Income Test

The first step in the Chapter 7 means test is a simple comparison of the current monthly income of the debtor(s) to the “state median income.” The median income is a figure set by the U.S. Census Bureau and is based on the state of residence and the number of dependents in the debtor’s family. This is compared with the “currently monthly income”, or CMI of the debtors. If the CMI is less than the median income, then the presumption of abuse does not arise and the debtor’s will qualify for Chapter 7 bankruptcy without further means testing.

It is important to note that “Current monthly income” (CMI) does not equal actual income. CMI is based on the average monthly income received from all sources during the six months prior to filing the bankruptcy case, ending on the last day of the month before the filing.

CMI consists of the following:

• Gross (before tax and deductions) wages, salary, tips bonuses, overtime, commissions
• Business income (net of expenses)
• Rental and other real property income
• Interest, dividends, and royalties
• Pension and retirement income
• Any amount paid by another person for the household expenses of the debtor, including child or spousal support
• Unemployment compensation that is not a social security benefit
• Any other income

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Step 2 -  Means Test Calculation

If the debtor’s Current Monthly Income is greater than the state median income, then step 2 of the test must be applied. The debtor’s CMI figure is reduced by various deductions, some of which are set national or local standard figures and some are debtor’s actual expenses. CMI is reduced by the following deductions:

Deductions under Standards of the IRS

• A marital adjustment for any amount that is included in CMI but not used for the contribution to the debtor or their dependents
• The IRS National Standard for food, clothing, household supplies, personal care, and miscellaneous
• The IRS local standard for housing and utilities not including mortgage expenses
• The IRS local standard for mortgage and rent expense, reduced by the amount of the 60 month average actual mortgage expense (recaptured later in the formula), if any
• Any adjustment to the housing and utilities standard
• IRS Transportation Standards for vehicle operation
• IRS Transportation Standards for ownership and lease expenses, reduced by the amount of the 60 month average actual secured vehicle payment (recaptured later in the formula), if any
• Average monthly federal, state, and local income, self employment, social security, and Medicare taxes
• Mandatory payroll deductions such as mandatory retirement contributions, union dues, and uniform costs
• Average monthly term life insurance expenses for the debtor only
• Any court ordered child or spousal support payments
• Education expenses that are a condition of employment or required for a physically or mentally challenged dependent child
• Child care expenses
• Health insurances not covered by insurance or a health savings account
• Telecommunications expense other than basic phone service such as cell phones, pagers, call waiting, caller id, long distance, internet service, etc. to the extent necessary for the health and welfare of the debtor and their dependents

Additional allowed expense deductions

• Health insurance, disability insurance, health savings account contributions
• Costs to necessary to support an elderly, chronically ill, or disabled member of the debtor’s household or immediate family
• Expenses actually incurred to maintain the safety of family under the Family Violence Prevention and Services Act
• Documented home energy costs that exceed the IRS guidelines above
• Reasonable and necessary documented children’s education expenses (limited)
• Additional food and clothing expenses, documented and strictly limited
• Charitable contributions

Debt Payment Deductions

• The 60 month average of the total amount due in the next 60 months to any secured creditor such as a mortgage (including taxes and insurance), car payment, or other secured creditor
• The 60 month average of any amount of default on any secured property necessary to avoid foreclosure or repossession
• The 60 month average of any tax, child support, spousal support, or other priority claims
• Estimated Chapter 13 administrative expenses

The current monthly income (CMI), reduced by the above deductions equals the debtor’s Disposable Monthly Income, or DMI. If the DMI, multiplied by 60, is less than $6575 (as of 2007 – adjusted periodically), then the debtor passes the means test, and step 3 is not required. If the DMI, multiplied by 60, is greater than $10,950 (as of 2007 – adjusted periodically), then the debtor fails the means test and can only file a chapter 7 in special circumstances. If the DMI, multiplied by 60 is between $6575 and $10950 (as of 2007 – adjusted periodically), then the debtor must proceed to step 3 of the test.

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Step 3 – Multiply non-priority, unsecured debt by 25%

If the debtor’s disposable monthly income, DMI, multiplied by 60, is less than 25% of the debtors unsecured, non-priority debts, then the debtor passes the means test. If the debtor’s DMI, multiplied by 60, is greater than 25% of the debtors unsecured, non-priority debts, then the debtor fails the means test and can only file chapter 7 only with a showing of special circumstances.

Related Topics:
Chapter 7 Bankruptcy
Chapter 13 Bankruptcy

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