What is the means test?

A common question we get is “What is the means test?”  In 2005 when Congress passed the Bankruptcy Abuse and Consumer Protection Act, it included several provisions showing a preference for people filing bankruptcy to repay some of their debt through a Chapter 13, as opposed to getting a discharge right away in Chapter 7.  The means test was the primary way Congress tried to push more people into filing Chapter 13 bankruptcies.

The means test is both very simple and very complicated. Very simply, the means test is a comparison of your household income to the median income for a household of your size in your state.  As of late 2020, the current median annual household incomes for Minnesota are as follows:

Household of 1 – $61,811

Household of 2 – $81,478

Household of 3 – $100,430

Household of 4 – $118,646

Household of 5 – $127,646

Household of 6 – $136,646

If you are below the median income then you can file a Chapter 7 bankruptcy to get your debts discharged right away.  If you are above the median income, this is where the means test becomes very complicated–it is still possible to qualify for a Chapter 7 bankruptcy if certain of your household expenses exceed your income.  This calculation is known as the “long-form” or “long” means test.

Many of the deductions from income used in the long means test are not your real monthly expenses but local and national standards used by the IRS when they complete a budget for you. These include standard allowed expenses for food and clothing, health care, housing, and vehicle expenses.

The long means test also uses some real deductions taken from your gross monthly income, including: payroll withholding taxes, mandatory pay deductions (like union dues), term life insurance monthly premiums you paid, child support and spousal maintenance, child care expenses, health/disability insurance premiums, HSA account contributions, verifiable charitable contributions made on a regular basis, limited educational expenses for a child, and secured debt payments over the amount allowed in the IRS standards, and a few other miscellaneous deductions.

If your household gross income is less than $128 higher than the expenses listed in the long means test (or is below your expenses) then you qualify for a Chapter 7 bankruptcy.  If your household gross income is more than $128 higher than your expenses, then you fail the long means test and you cannot file a Chapter 7 (or can file a Chapter 7 only if you have certain specific special circumstances to justify filing a Chapter 7 bankruptcy case).  If you cannot file a Chapter 7, then you can file a Chapter 13 or a Chapter 11.

How household size is determined

In Minnesota the standard we generally follow is “heads on beds” meaning how many people sleep in the household.  This includes roommates, children (whether living in he home full time or part time), significant others, and spouses.

How household income is measured

The means test counts all income received by you and your spouse if married (regardless of whether your spouse files bankruptcy with you) during the 6 months prior to the filing of the bankruptcy case. Pension, child support, unemployment compensation, and worker’s compensation payments or other private disability payments all count as income. It also includes any money that other household members pay to you to help pay for living expenses. This is typically a significant other or renter in the home. Very few sources of income do not count on the means test: Social Security Income, Social Security Disability Income, some unemployment income, and VA Disability Income.

Withdrawals from IRAs, 401ks or proceeds from the sale of property you own do not count as income (though these transactions should be identified in other parts of the bankruptcy petition). Those are benefits from income you have already earned.

Exceptions to the means test

Congress has created several very narrow exceptions to the means test, meaning certain people can file a Chapter 7 bankruptcy without having to take the means test.  The first and most common is that a person who has “primarily non-consumer debts” can file a Chapter 7 bankruptcy case if their debts (in terms of dollar amount of their debts) are primarily not consumer debts.  This is most commonly used by business owners and guarantors who are filing bankruptcy after their business closed with substantial business debt.  Tax debt is also considered non-consumer debt.

A second narrow exception to the means test is for disabled veterans who incurred the majority of their debts while on active duty in the military or performing homeland defense activities.

A third narrow exception to the means test is for reservists or national guard members who served on active duty or performed homeland defense activities within 540 days prior to filing bankruptcy.

Prescott Pearson & Tande has calculated tens of thousands of means tests for clients and potential clients.  We have the experience and deep knowledge to ensure that your means test is calculated right and that all possible deductions from the long means test have been claimed.  If you have questions about qualifying for bankruptcy or how the means test might apply to you, please contact us!