What is the financial means test and how does it impact my bankruptcy?

One of the crucial factors in determining whether a bankruptcy case should be filed under Chapter 7 or Chapter 13 partly depends on the outcome of tests called the means test and the median income test. These tests are often used synonymously, but they measure different aspects of your eligibility to file for bankruptcy under Chapter 7 or 13.

What is the median income test?

Under the Bankruptcy Code, the median income test requires a review of the last six months of gross income, which is referred to as the "current monthly income." The income is averaged, and then compared to a household of the same size in the state that you live in. If your median income is below the state's median income, then you are eligible to file bankruptcy under either Chapter 7 or Chapter 13. If the median income is higher than the state median income, then the means test is triggered.

What is the means test?

The means test considers both income and certain allowed expenses and deductions, whereas the median income test only considers current monthly income and household size. In other words, the median income test reviews gross income, while the means test allows certain expenses and deductions (withholding taxes, health insurance, term life insurance, etc. . .) to be taken against the gross to determine the disposable median income.

Keep in mind that the median income test only applies if the debts are primarily consumer debts, or in contemplation of filing a Chapter 13 bankruptcy.

In order to calculate the current monthly income, the prior six months of income information must be gathered. Remember that even if only one spouse is filing, income for both the husband and wife must be included. Annual bonuses may be amortized and must also be included in the income analysis. The annual income is estimated based on the prior six months of income, and then compared to a family of the same size. If you are below the median, then there is no presumption of abuse in a Chapter 7 analysis, and the means test is not triggered. However, if you are above the median, then in a Chapter 7 case, a presumption of abuse arises, and the means test is triggered. As a practical point, if you are above the median, you will need to file a Chapter 13 case.

There are certain exceptions to the means test and median income test that may apply. You should consult with an experienced bankruptcy lawyer for more information on how these test might apply to your situation.