What is the “Means Test” In A Bankruptcy Case?

The term “Means Test” as used in the bankruptcy context is a standard in the Bankruptcy Code used to determine the debtor’s eligibility to file bankruptcy under Chapter 7. The cornerstone of the means test is the concept of “abuse”. If the debtor’s case is found to be abusive of the provisions of Chapter 7, the debtor may be required to convert to Chapter 13 or have his bankruptcy case dismissed.

Abuse may be found if the debtor’s income exceeds a certain threshold in relation to his expenses. Put most simply, the means test seeks to force debtors who earn enough money to both meet their ordinary living expenses and pay back some part of their unsecured debts into Chapter 13 where the debtor subjects his future earnings to the jurisdiction of the Bankruptcy Court and, at least theoretically, pays back some portion of his unsecured debts. 11 U.S.C. 707(b)

So how much money is too much money to be eligible for Chapter 7? The first step in that calculation is to look at the “Median Income” for the applicable state. The median income data is compiled by the I.R.S. and can be found here. As of this writing, the median income for the state of Mississippi is, in annual figures: $35,306 for a household size of one person; $44,149 for two or three people; $51,140 for four – and so on as shown in the tables. These amounts are updated periodically and usually increase, so if a debtor is only slightly above the median income and likely to be forced into Chapter 13, he may decide to wait a few months to file if that is otherwise practical.

If the debtor is below the applicable median income for his household the means test is finished. If, however, the debtor finds himself above the median, then the next step is to calculate his applicable deductions to determine if he may yet be eligible for Chapter 7.

Unlike median income which varies by state, some deductions such as food and clothing are the same nation wide, while others such as housing and utilities are calculated county by county as well as household size as seen here. A debtor residing in Hattiesburg in Lamar County with a household size of 4 would be allowed $1164.00 per month for rent or mortgage expenses and $566 for non-mortgage housing expenses such as utilities. The same Hattiesburg debtor living on the Forrest County side of the line would be allowed $964 for rent or mortgage and $591 for non-mortgage housing expenses. Other deductions are allowed as well, for instance: reasonably necessary health insurance, operating and ownership costs for vehicles, expenses for the care of a family member who is disabled, elderly or chronically ill. 11 U.S.C. 707.

Once the debtor has taken all applicable deductions, the amount remaining is compared to certain limits set by the Bankruptcy Code. If the debtor is below these thresholds, he will be allowed to proceed with Chapter 7; otherwise he may be required to convert to Chapter 13 and pay back a portion of his unsecured debts or face dismissal of his case.

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