The Bankruptcy Means Test – How Does It Work

A bankruptcy means test is what the name implies. The purpose of the test is to see if you have the means to pay for at least some of your debts before they are discharged in bankruptcy. For cases filed on or after October 17, 2005, it remains the law that any individual may file a case under any Chapter of Title 11 for which they are qualified. It also remains the law that the court may dismiss a Chapter 7 case for “abuse,” which need no longer be “substantial.” Congress enacted a mechanical means test for determining whether a Chapter 7 filing should be presumed to be abusive.

Calculating the Means Test

Performing the means test is straightforward mathematical formula, but very tedious, using form B22A. The first step is to average the debtor’s income from every source during the preceding six calendar months. A married debtor must also average his or her spouse’s income during the same period, unless the spouses are separated for purposes other than avoiding the means test. Regular contributions toward household expenses by persons other than the debtor are counted in this total. The resulting average is called Current Monthly Income (CMI), even though it is neither current, monthly, nor limited to actual income.

The second step in the means test is to compare CMI with the median income for households of the same size in the debtor’s state. Each state’s average is based on US census figures; click https://www.justice.gov/ust/eo/bapcpa/20081001/meanstesting.htm. If the debtor’s CMI (or the debtor’s plus the spouse’s CMI) is above the median income, creditors will later be permitted to file dismissal motions based on alleged abuse. If the total is less than the median income, only the United States Trustee (or the court acting on its own initiative) can file such a motion.

The third step in the means test is the most counterintuitive. If a married debtor is filing individually, the non-filing spouse’s income has so far been part of the CMI calculation. The B22A form directs the debtor to subtract back out all of the non-filing spouse’s income that is not a contribution to household expenses. When this part of the calculation is complete, the resulting “adjusted CMI” will include all of the debtor’s income for the six preceding calendar months plus any regular contributions made by the spouse to the debtor’s household expenses. This new number is compared to the state median income for households of the same size. If it’s smaller, no presumption of abuse arises. If it’s bigger, there are more calculations to perform.

The fourth step in the means test, which need only be done if the debtor’s adjusted CMI is above median, is to calculate deductions in many categories. It’s not possible in a short online discussion like this one to explain how to do this, and the B22A form is (unfortunately) not self-explanatory in every case. The result of subtracting deductions from adjusted CMI is the debtor’s Net Monthly Income (NMI).

The fifth and final step in the means test is to decide how much unsecured debt could be repaid over 60 months using all of the debtor’s NMI. In summary, the decision tree goes like this: • If NMI is less than $8,175, there is no presumption of abuse. • If NMI is greater than $13,650, there is a presumption of abuse. • If NMI is between those two numbers, further calculation is required. (The figures of $8,175 and $13,650 increase every three years for inflation, with the next increase scheduled for April 1, 2022.) If the result is greater, there is a presumption of abuse; otherwise, there is no such presumption. (This calculation determines whether the debtor could repay at least 25% of unsecured debt over the course of a 60-month Chapter 13 plan, which is what the statute actually directs the debtor to figure out. The statutory test is harder to describe.)

Rebutting the Presumption of Abuse

A presumption of abuse just means that a Chapter 7 filing is presumed to be abusive in the absence of evidence proving otherwise. A debtor for whom the presumption arises may still rebut the presumption by offering evidence of special circumstances. For example, victims of natural disasters like Hurricane Katrina may show income loss, expense increase, and other adverse effects of the disaster in order to demonstrate special circumstances.

Case Studies: The Bankruptcy Means Test

Case Study 1: Overcoming the Presumption of Abuse

Mary, a debtor with above-median income, faced a presumption of abuse in her Chapter 7 bankruptcy filing. However, she had experienced significant financial hardships due to a recent natural disaster, which resulted in income loss and increased expenses.

Mary presented evidence of these special circumstances to rebut the presumption of abuse successfully. This case highlights how debtors can overcome the presumption by providing evidence of special circumstances.

Case Study 2: Navigating Complex Calculations

John, a married debtor, sought Chapter 7 bankruptcy individually, considering the non-filing spouse’s income as part of the means test calculation. However, the B22A form’s complexities made it challenging for John to accurately deduct the non-filing spouse’s income that was not a contribution to household expenses. This case delves into the difficulties debtors may encounter while navigating the detailed calculations of the means test.

Case Study 3: The Impact of Changing Median Income

Emma, a debtor filing for Chapter 7 bankruptcy, found herself in a unique situation as the median income figures changed for her state since her last assessment. The shifting median income impacted her means test results, leading to different presumptions and calculations. This case emphasizes how changes in median income figures can influence the outcome of the bankruptcy means test.