Bankruptcy Means Test in Chapter 7
To qualify for Chapter 7 bankruptcy, most debtors must meet certain income limitations. Determining eligibility for Chapter 7 bankruptcy is a two-step process. First, the debtor’s “current monthly income” (see below) must be determined. If the debtor’s current monthly income is below the applicable state median income, then the debtor qualifies for Chapter 7 bankruptcy. Debtors with current monthly income above the state median income must pass what is known as the “Chapter 7 means test”.
Information Center for the Chapter 7 Means Test
- What is the median income in New York State?
- How is “current monthly income” determined for bankruptcy purposes?
- When is the Chapter 7 means test required?
- What is the “marital adjustment”?
- What are the deductions from income in the Chapter 7 Means Test?
- Do I pass the Chapter 7 Means Test?
- What if I do not pass the Chapter 7 Means Test?
Median Income in New York State
Median income varies by state, and is based on family size. The median income is the point at which half the households in the state earn more income, and half the households in the state earn less income, than the median amount.
The median income in New York State, based on family size, according to the U.S. Census Bureau, is:
- One Person in Household, $53,132
- Two People in Household, $68,087
- Three People in Household, $80,840
- Four People in Household, $98,583
- For households exceeding four people, add $8,400 for each individual in excess of four
When calculating state median income, it is important to use current Census Bureau information, as it is updated annually and is subject to change.
Current Monthly Income in Chapter 7
Debtors seeking to file for Chapter 7 bankruptcy must first determine whether their “current monthly income” is less than, or exceeds, the state median income. Current monthly income is the average income for the six full months preceding the month of the bankruptcy filing. It is based on gross income (i.e. before deductions for taxes, medical insurance, etc.), and includes almost all forms of income (except social security income), including:
- Spousal support and child support
- Regular contributions to the debtor’s household
- Net business income
- Net rental income
- Interest, dividends, and royalties
- Unemployment benefits
- Pension/retirement income
Income earned by the debtor’s spouse is included, even if the spouse is not filing for bankruptcy. However, if the debtor and spouse are living apart, or are legally separated, the spouse’s income is not included. The debtor must declare under penalty of perjury that the debtor and spouse are not living apart for purposes of evading the means test.
When is the Chapter 7 Means Test Required?
Debtors whose current monthly income is less than the state median are not required to complete the means test prior to filing for Chapter 7 bankruptcy. Debtors with current monthly income in excess of the state median income must complete the means test, unless they qualify for one of the following exemptions. The means test does not apply if:
- The debts incurred by the debtor are not primarily consumer debts (i.e. over 50% of the debts are business related debts).
- The debtor is a disabled veteran whose indebtedness occurred primarily during a period in which the debtor was on active duty or while performing a homeland defense activity.
- The debtor was a member of the Armed Forces Reserves or National Guard who was on active duty or homeland defense for at least 90 days during the 540 days preceding the bankruptcy filing.
The Means Test Calculation Explained
The means test starts with the debtor’s current monthly income (as defined above), and then deducts for certain allowable expenses. Some of the deductions are based on Internal Revenue Service (IRS) standards, while others are based on the debtor’s actual expenses. The end number is the debtor’s Monthly Disposable Income. The monthly disposable income determines whether or not a debtor can file for bankruptcy under Chapter 7.
What follows is an explanation of how the means test calculation is performed.
Marital Adjustment to Income
The first step in the means test calculation is what is known as the “marital adjustment.” In Chapter 7, the marital adjustment only applies in cases where the debtor is 1) married 2) living in the same household with their spouse and 3) the spouse is not filing for bankruptcy. The purpose of the marital adjustment is to subtract income of the spouse that is not regularly used to pay for the household expenses of the debtor or the debtor’s dependents. Such expenses may include:
- spouse’s income taxes
- spouse’s life and health insurance premiums
- spouse’s union dues
- spouse’s contributions to retirement plans
- payments for debts solely in the spouse’s name, including credit cards, student loans, and automobile loans
- spouse’s payments for child support (for children other than the debtor’s) or spousal maintenance (from a previous marriage)
The total marital adjustment cannot exceed the spouse’s monthly gross income (based on average of six months preceding the bankruptcy filing).
After deducting the above expenses of the debtor’s non-filing spouse, the amount remaining is the “adjusted current monthly income.”
Deductions from Income
After the marital adjustment is performed, all other deductions from income must be determined. Deductions from income are not all calculated the same. Deductions fall into one of the following categories:
- local standard
- national standard
- actual expense
Applying the deductions can be complex and confusing. An experienced bankruptcy attorney will ensure that the means test is calculated properly.
National Standards for Living and Healthcare Expenses
For means testing purposes, certain deductions must be calculated using a national standard. This is a set figure established by the Internal Revenue Service (IRS). The figure does not consider the actual amount spent by the debtor on the particular expense. There are two deductions on the means test that utilize the national standards.
- Food, clothing and other items
- Out of pocket health care allowance
Based on the most current IRS table, the maximum a single debtor can deduct for food, clothing, and other items is $647, irrespective of the amount actually spent.
The out of pocket health care allowance is currently $52 per person under the age of 65, and $114 per person for those 65 and older.
Local Standards for Housing and Transportation Expenses
Similar to the national standard, local standards are set figures that a debtor may deduct from his or her current monthly income. The local standards are specific to the state and county in which the debtor resides. Generally, a debtor may deduct the local standard or the amount actually spent on a particular expense, whichever is less.
Local Standards for Housing Expenses
The local standard amount for housing costs depends on the state and county in which the debtor resides, and the size of the debtor’s family. The following expenses are included in the housing and utility expense:
- Mortgage or rent
- Property taxes
- Maintenance and repairs
- Electric, water, heating
- Garbage collections
- Telephone, internet, cell phone, and cable
It is imperative to properly identify the county of residence when calculating the local standard for housing and utilities. For example, the maximum mortgage/rent deduction for a single debtor differs significantly from Suffolk County, NY to Nassau County, NY.
In Suffolk County, the maximum a single debtor may deduct for mortgage or rent expense is $1,958, while in Nassau County a debtor may deduct $2,258 for the same expense.
An individual contemplating bankruptcy, and who is planning to move to a new residence, must consider the impact that moving to a different county can have on their ability to file under Chapter 7.
Local Standards for Transportation Expenses
Calculating transportation expenses involves three separate types of expenses – 1) vehicle operating expense; 2) vehicle ownership expense; and 3) public transportation expense. A debtor may deduct the allowable transportation expense or the actual amount spent, whichever is less.
Vehicle Operating Expense
Only debtors that own, lease, or pay the operating expenses for a vehicle may take a deduction for vehicle operating expense. Operating costs are calculated using a local standard and vary based on region. Operating costs include the following:
- Maintenance and repairs
- Parking and tolls
In New York State, debtors residing in Bronx, Dutchess, Kings, Nassau, New York, Orange, Putnam, Queens, Richmond, Rockland, Suffolk, and Westchester counties may deduct a vehicle operating expense of $304 for one automobile, or $608 for two vehicles. In any other county in New York State, the vehicle operating expense is $230 for one automobile, or $460 for two vehicles.
Vehicle Ownership Expense
A debtor may claim the vehicle ownership expense only if the debtor either owns a vehicle and is making loan payments for the vehicle, or is leasing a vehicle. Although it is considered a local standard, the allowable deduction is the same throughout the U.S. The deduction is $497 for one vehicle, and $994 for two vehicles. Generally, a debtor whose household contains a single driver may claim an ownership expense for only one vehicle. A debtor may not claim an ownership expense for more than two vehicles.
Public Transportation Expense
Debtors that do not claim a vehicle operating or ownership expense may claim the full public transportation allowance, regardless of whether they use public transportation. The public transportation expense is $173 throughout the U.S.
Debtors that claim a vehicle operating or ownership expense may also claim a public transportation expense, up to a maximum of $173, if they actually incur public transportation expenses.
In addition to the expenses listed above, debtors may deduct their actual monthly expenses for the following categories:
- Income Taxes. This includes federal, state, and local income taxes; self-employment taxes; and social security and Medicare taxes. Debtors may only deduct their actual tax liability. Debtors that receive or expect to receive tax refunds must divide the tax refunds by twelve, and subtract that amount from the total monthly taxes withheld from their pay.
- Involuntary Deductions. This is the monthly total of all payroll deductions required by the debtor’s employment, including union dues, uniform costs, and mandatory retirement contributions. This does not include voluntary retirement contributions.
- Life Insurance. Only premiums for term life insurance may be deducted, i.e. not whole life insurance premiums.
- Court Ordered Payments. This includes child support and spousal support. The support payments must be pursuant to a court order, or judgment of divorce. Support paid voluntarily, or by agreement only, may not be deducted.
- Educational Expenses. Allowable only if the educational expenses are required as a condition of the debtor’s employment or the expenses are for a disabled dependent child and no public education is available.
- Childcare. Includes babysitting, daycare, nursery school, and preschool.
- Additional Health Care Expenses. Only if not reimbursed by insurance or health savings account, and only to the extent the actual expenses exceed the national out of pocket health care allowance.
- Insurance Premiums. Includes health and disability insurance and health savings account deductions.
- Care of Household or Family Members. Includes expenses incurred for care and support of elderly, ill, or disabled members of the debtor’s household or immediate family, only if they are unable to pay for such expenses.
- Educational Expenses for Dependent Children Under 18. Includes private or public school expenses up to a limit of $160.42 per child, per month. The debtor must be able to show that the expense is reasonable and necessary.
- Charitable Contributions. Includes continuing contributions to religious or charitable organizations.
Debtors may deduct the average monthly payment for secured debts that are contractually due within the sixty month period after the filing of the bankruptcy. Examples of secured debts are those owed for automobile loans, mortgages, and home equity loans. Mortgage debts include property taxes, and property insurance, even if these expenses are paid directly by the debtor, i.e. not through the mortgage lender.
If there are more than sixty months of payments remaining on the loan, then the actual monthly payment will be the same as the sixty month average. However, if there are less than sixty months remaining, then the total remaining payments must be added up, and divided by sixty, to determine the average monthly payment due.
The deduction for secured debts is not in addition to the deduction for vehicle ownership expense, or the deduction for housing expense. However, to the extent that payment for secured debt exceeds the vehicle ownership or housing expense, then the debtor may deduct the higher amount. For example, if the average monthly payment for a debtor’s automobile loan exceeds $497 per month, then the debtor may deduct the higher amount.
Keep in mind that excessively high monthly payments for luxury automobiles may be questioned by a bankruptcy trustee or the U.S. Trustee’s Office, and may be cause for a motion to dismiss a case on the grounds that the case is an abuse of the provisions of Chapter 7.
In addition to the average monthly payment, a debtor who has fallen behind on payments for a secured loan may deduct the amount necessary to bring the loan current (the cure amount), divided by sixty. This provision only applies to property that is necessary for the support of the debtor or the debtor’s dependents. In other words, an objection could be raised if a debtor deducts arrears owed for a pleasure boat or recreational vehicle.
Amounts due for priority debts, including past due domestic support obligations, and priority income taxes, may be deducted on the means test. The total amount owed is divided by sixty.
Do I Pass the Chapter 7 Means Test?
To determine if a debtor passes the Chapter 7 means test, subtract all allowable deductions, as detailed above, from the debtor’s “adjusted current monthly income” to arrive at the debtor’s “monthly disposable income.”
The Chapter 7 means test is a “pass-fail” test. An individual “passes” the means test if:
- “Monthly disposable income” is less than $128.33; or
- “Monthly disposable income” is less than $214.17 and is less than 25% of the debtor’s nonpriority unsecured debts.
If the debtor passes the means test, then there is no “presumption of abuse.” This means that, from the standpoint of the debtor’s income, the debtor qualifies to file for Chapter 7. Keep in mind, however, that there are many other factors that go into determining if a Chapter 7 bankruptcy filing is appropriate in a particular individual’s situation.
If a debtor does not pass the means test, then a “presumption of abuse” arises. This does not literally mean a debtor is abusing the bankruptcy system, but rather that Chapter 7 bankruptcy relief should not be granted.
A debtor can rebut the presumption that filing for Chapter 7 is abusive by a showing of “special circumstances.” Special circumstances may apply to either means test income or expenses.
On the income side, the debtor may be able to demonstrate that the debtor’s income has been reduced from the six-month average that formed the basis of the “current monthly income.“ Or there may have been unusual or one-time additional income that the debtor will not be receiving again, such as retroactive pay or severance pay.
On the expense side, a debtor would have to show that he or she incurs expenses that are not included in the allowable expenses included in the means test.
To establish special circumstances, a debtor must itemize each additional expense, or adjustment to income, and provide supporting documentation. In addition, a detailed explanation as to the special circumstances that make such expenses, or adjustments to income, necessary and reasonable, must be provided. The debtor must also provide a sworn statement attesting to the accuracy of any information provided to demonstrate that the additional expenses or adjustments to income are required.
Finally, the additional expenses, or adjustments to income, must be sufficient to reduce the debtor’s monthly disposable income below the Chapter 7 means test limits, as described above.
If the debtor cannot overcome the presumption that filing for Chapter 7 is abusive, then the Chapter 7 case will be dismissed. Alternatively, the debtor can convert the case to a case under Chapter 13, if the debtor otherwise qualifies for Chapter 13.
What About Debtors that Do Not Pass the Chapter 7 Means Test?
If an individual contemplating bankruptcy does not pass the means test, the next step would be to determine if waiting a period of time would change the means test outcome. A debtor whose income is variable might be able to pass the means test by waiting until their six-month average income was sufficiently lower. For example, this might apply to an employee that works overtime only during particular times of the year.
Likewise, it is possible that waiting to file the bankruptcy case would permit the debtor to claim certain deductions on the means test. For example, a debtor may be planning to move to a state or county where the local standards for housing expenses are higher. Or perhaps the debtor’s situation will allow him or her to finance an automobile purchase, or to lease a vehicle, prior to filing for bankruptcy, thus allowing the debtor to claim the vehicle ownership deduction.
Individuals in need of bankruptcy relief, and for whom waiting to file will not bring them below the Chapter 7 means test limits, may be able to file for bankruptcy under Chapter 13.
Bankruptcy Means Test Resources
U.S. Trustee Program – This site contains data that is used in conducting a Means Test analysis, including data from the Census Bureau and I.R.S.
Contact Andrew M. Doktofsky, P.C. at 631-812-7020 for a free consultation about the means test in bankruptcy, and how it applies to your particular situation. Andrew M. Doktofsky will conduct a Chapter 7 means test analysis at no charge, to determine if you are eligible to file for Chapter 7 bankruptcy.