I’ve had clients tell me that they “know” high-income debtors can’t qualify for Chapter 7 bankruptcy because they can’t pass the means test. While this isn’t entirely accurate, it does give me the opportunity to explain what the means test is.
To start, you need to know that it’s not really a question of “qualifying” for Chapter 7 bankruptcy. It’s a question of whether a Chapter 7 filing would be presumed to be an abuse of the bankruptcy system. This presumption may be rebutted, but the burden of proof is on the debtor. If the presumption of abuse arises and is not successfully rebutted, you will have the option of allowing the case to be dismissed or converting the case to a Chapter 13 bankruptcy.
(In a Chapter 13, the means test has another purpose. I’ll address that some other time.)
Whether a Chapter 7 bankruptcy filing is presumptively abusive is a two-part test. First, we compare your income to the median income for a similarly-sized household in your state. Currently, the median income in Wisconsin for a household of four is $77,000. If your income is below the median, you’ve passed the first test and your case is not presumptively abusive. If your income is above the median, you are required to go to the second part of the test, the means test.
The means test is essentially a set of deductions Congress has decided bankruptcy filers are allowed to take. Once your monthly income has been determined by looking at your last six months of employment and other income, the means test allows deductions from that monthly amount. Allowed deductions include:
• payments on secured & priority debts,
• withholding taxes,
• insurance premiums,
• reasonable housing, transportation, and food allowances,
• child care.
After these deductions, if you have less than approximately $100 left over, you’ve passed the second test and your case is not presumptively abusive. If you have more than $100 or so left over, your case may be presumed to be an abuse. In that case, the U.S. Trustee will file a motion to have your case dismissed or converted. You can either allow your case to be dismissed, convert to a Chapter 13 and pay that surplus to your unsecured creditors each month for the life of your Chapter 13 plan, or argue to the judge that you should be allowed to remain in Chapter 7.
Remember, the means test only helps determine if your filing is *presumed* to be abusive. The presumption can be rebutted so that higher-income filers who can’t pass the means test can remain in Chapter 7. On the other hand, the U.S. Trustee may believe a case that is not presumed to be abusive is actually an abuse of the system based on the totality of the circumstances. In that case, the U.S. Trustee may still file a motion to have your case dismissed or converted to Chapter 13.
The choice between filing under Chapter 7 and Chapter 13 is one of the most important decisions my clients make. Your bankruptcy attorney can let you know how your particular circumstances will affect the means test calculations in your case.