Means Test
The purpose of the means test is to create a projection of the debtor’s net income and expenses to see if the debtor would have sufficient surplus funds to make some kind of meaningful payment to creditors. In doing so, the starting point is to ascertain what the debtor’s income was during the six month calendar period prior to the bankruptcy filing. Specifically, Section 707(b)(2) of the Bankruptcy Code sets forth the statutory language for the “means test” and whether an individual debtor’s chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor’s aggregate current monthly income is above the median income for his applicable family size (see definitions below) and his projected disposable income over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor’s non-priority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.
Current monthly income
The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from non-debtors including a non-filing spouse and all of the income from the debtor’s spouse if the petition is a joint petition, but not including social security income and certain other payments made because the debtor is the victim of certain crimes. 11 U.S.C. § 101(10A). One consequence of of the six month look-back period is you often get a lopsided result. For example, if the debtor received a bonus in the prior half-year, his means test would effectively double this income because the means test would assume that the bonus would be paid every six months. Conversely, if the debtor waited more than six months after receiving the bonus, the debtor would not even have to count the bonus as income. This creates planning opportunities and challenges that must be carefully considered by counsel. Moreover, because of this uneven result, bankruptcy attorneys often engage in a strategy of timing the filing in order to pass the means test for Chapter 7 or to reduce the payment obligation in a Chapter 13. In addition the fact that most court’s have held that income is counted when received not earned must also be considered. For example a big commission might not be paid until months after a sale is concluded and when paid may unfavorably distort the current monthly income average. For a summary of recent court decision holding that you count the income only when received see my blog post “Income is Counted When Received not Earned.”
Median Income by Family Size for California as of 3/15/2011
California Family Size
- $48,009
- $62,970
- $68,670
- $78,869
Add an additional $7,500 for each additional household member if the household has more than four persons in it.
For more information about the means test please follow the link below to the U.S. Department of Justice, United States Bankuptcy Trustee webpage entitled Census Bureau, IRS Data and Administrative Expenses Multipliers. http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm
