The Means Test: Chapter 7 vs. Chapter 13 Bankruptcy Effects
The so-called bankruptcy "Means Test " is widely known as the standard or test for eligiblity in Chapter 7 bankruptcy, but it also governs the amount that must be paid on a monthly basis in a Chapter 13 bankruptcy payment plan, as well as the length of time for which payments must be made in a Chapter 13.
The Means Test & Michigan Chapter 7 Bankruptcy
The Means Test in Chapter 7 bankruptcy is the eligibility test for Chapter 7. At its heart, the means test is a mathematical formula that looks at the gross income earned by all earning members of the household of a person filing for bankruptcy, regardless of whether those other people are part of the bankruptcy or not, over the 6 months prior to filing. The Means Test averages up that 6 months' worth of gross (pre-tax, pre-deduction) household income from all sources (other than Social Security Age or Disability benefits), multiplies it by 12 (months) and then compares that hypothetical annual household income to the median income for a household of that size in the state in which they reside. If the household income is higher than the median, the person seeking the bankruptcy "fails" the Means Test . Read more here about the current Michigan median household income numbers. (Note that these numbers are subject to change without revision of this article—but they are accurate as of this writing, December 7, 2012.) Which is to say, he or she may need to file a Chapter 13 bankruptcy instead. Fortunately, it is not so simple as the simple comparison described above suggests. If household income averages out to be above the Michigan median, for instance, there are a variety of deductions available to potentially reduce the income back down "under the median" so that the propsective filer is eligible for a Chapter 7 bankruptcy after all. Among these deductions are: secured debt payments for a home or a car, child care expenses, basic transportation and home expenses (tied to IRS "allowable household expenses"), and others. An experienced Michigan bankruptcy attorney such as John M. Hillla will be able to parse your financial circumstances for the maximum deductions available if you are "above-median" in order to give you the best shot at Chapter 7 bankruptcy eligiblity. However, it should be remembered that these deductions do not exactly mirror the "real" expenses your household experiences on a monthly basis. They are limited and not necessarily reality-based. The Means Test is the result of a provision inserted into the Bankruptcy Code in the 2005 BAPCPA amendment to the Code as a somewhat disengenuous attempt by anti-consumer lawmakers to root out fraudulent bankruptcy petitions, despite that fact that no evidence was proffered to prove that there was any widespread national problem with consumer bankruptcy fraud. The purpose of the Means Test, essentitally, is to push more people into Chapter 13 bankruptcy, where some of their debt will be repaid to creditors, and, then, to cause them to have to pay more once they are there. It is not a "fair" test, and it is not intended to be. If the Means Test, after all of this, determines that there is a "presumption of abuse" in the debtor's petition, that presumption can be rebutted by certain "special circumstances." What this amounts to, basically, is an argument that there are reasonable reasons why your income falls where it does and that those reasons are not abusive or fraudulent. Each bankruptcy court has wide latitude to agree or disagree with this argument, and it takes a skilled attorney to carry it across.
The Means Test in Chapter 7 Bankruptcy: Safe Harbors
Some Chapter 7 debtors, however, need not utilize the Means Test at all. First, the Means Test is applied only to consumers whose debt is primarily consumer debt and not business or other debt. If the "majority" of your debt is "non-consumer" debt—that is, business-related debt, tax debt, or a few other forms of debt, the Means Test need not be completed at all. Again, an experienced Michigan bankruptcy such as those of The Hilla Law Firm, PLLC can assist you with this determination and making the case to the US Trustee that you are not a "consumer" debtor, in litigation if need be. In addition, the Means Test is not applicable to disabled veterans or active duty military reservists or National Guardsman on deployment overseas. (It is applicable to "regular" military servicemen and -women, however.)
The Means Test in Chapter 13 Bankruptcy
Once in Chapter 13 bankruptcy, the Means Test serves other purposes: (1) to determine whether you are eligible for a 3-year Chapter 13 payment plan or whether you must file a 60-month, 5-year Chapter 13; and (2) to determine whether there is a minimum amount of money you must pay over the life of the Chapter 13 payment plan to your unsecured creditors (medical debt, credit card debt, etc.), or whether you need only pay what you can afford after reasonable monthly expenses each month. The Means Test and The Length of the Chapter 13 Payment Plan: The Means Test rule here is fairly simple. If your household income is cleanly passing under the median income for a household of its size without the need to apply any of the available deductions, you may propose a 3-year, 36-month Chapter 13 payment plan to the Bankruptcy Court. If you are "above-median," you must propose a 5-year, 60-month Chapter 13 payment plan unless you are able to pay 100% of your unsecured debt in a shorter period of time.
The Means Test and The Chapter 13 Monthly Payment Amount: The mathematics of the Means Test will also determine whether, at the end of the hypothetical income-and-expense month that is constructed in its calculation, you have any "disposable monthly income," or "DMI." It's easier to illustrate this than explain it, so, for example, if, after inputting your 6-months' worth of household income and applying all of the deductions, the Means Test thinks you have $100 left after allowed expenses/deductions, you have $100 of DMI. In order to have your Chapter 13 bankruptcy plan confirmed (approved) here in the Eastern District of Michigan, you must minimally pay to your unsecured creditors, who get paid after everyone else gets paid in a Chapter 13, at least your DMI multiplied by the number of months in your payment plan. So, if you have $100 of DMI and are in a 60-month plan, at the end of the Chapter 13 bankruptcy, after administrative, secured, and priority debts are paid, you must have at least $6,000 left sitting in your pot for the unsecured creditors. If you have no DMI per the Means Test's calculation, you need only pay whatever is left of your net monthly income after your real-world monthly expenses are deducted over the 60 months, conceivably as little as $1.00 or even less to your unsecured creditors. Thus, the Means Test is not the straightforward income comparison many believe it to be. There are a variety of online "Means Test Calculators" available on the internet that allege to be able to tell you whether you are Chapter 7 eligible or not. Simply put, without a proper understanding of the available deductions and the judicial case-law regarding the application of deductions and expenses in the Means Test, it just isn't possible for a lay-person to accurately calculate the formula. An experienced Michigan bankruptcy attorney should always be consulted if you are considering filing for bankruptcy. If you are a Michigan resident and are considering filing for bankruptcy, please contact us at (866) 674-2317 or click the button below to schedule a free, initial consultation.