Bankruptcy Means Test

The means test evaluates your income in comparison to the official median income for households in Florida as reported by the Bureau of Census in the most recent reporting year. The median income base increases with the size of your household.

The means test evaluates whether your current monthly income (from all sources) is greater or less than the applicable median income. Current Monthly Income (CMI) has a special meaning in the new bankruptcy law. CMI is defined as the average monthly gross income received during the six full months just prior to your bankruptcy filing. CMI includes gross income from all sources including income of a non-filing spouse, regular gifts or assistance from family members, and gross income from a wholly-owned business. (Business expenses are deducted elsewhere in the means test calculations.) On the other hand, social security income is excluded from the definition of CMI.

If you earned $10,000 per month from January through March and then were unemployed from April through June, your CMI as of July 1 would be $5,000 per month or $60,000 on an annualized basis. The new bankruptcy law states that if your annualized CMI ($60,000 in this example) is less than the Census Bureau’s median income for your family size in Florida, then you have automatically passed the means test, and you are eligible to file Chapter 7 bankruptcy. Currently, the Census Bureau’s median income for a single person in Florida is $42,053 (or $3,504 per month) and the median income for a Florida family of four is $64,722 (or $6,393.50 per month).

If your CMI exceeds Florida’s median income, then the means test applies a more complicated expense formula to arrive at your eligibility for Chapter 7 bankruptcy. The formula starts with your CMI and then deducts several categories of allowed expenses to calculate your “net monthly income” which is presumed to be available to pay general unsecured creditors. The means test deducts the following expense categories from “current monthly income” to arrive at your “disposable income.”

Standard Living Expenses. You can deduct an amount of “standard living expenses” established and published by the IRS as guidance for its agents negotiating consensual payment of overdue taxes. Debtors may claim documented living expenses up to 5 percent above the IRS standard if such expenses are “reasonably necessary.”

Housing Expenses. The IRS publishes “local standards” of transportation and housing expenses. The local housing allowance is different for each county in Florida and further varies depending on your household size. The housing allowance includes estimated cost of home ownership and operating expenses such as utilities and taxes. If you are buying a home and have a mortgage, you are also allowed to deduct from your CMI the amount of mortgage payments due during the ensuing five years. However, if you are paying a mortgage, the local housing allowance will be reduced by the amount of its assumed ownership expense so that your mortgage payments are not counted twice in the means test formula. Renters are limited to the IRS local standard allowance.

Transportation Expenses. Transportation expenses are comprised of two separate expense categories related to vehicle ownership: “operating expenses” and “ownership expenses.” Operating expenses are standard published expenses which vary according to the number of cars owned and where you live. Your deductible ownership expense is computed as the higher of (1) the IRS national standard ownership allowance based on the number of family cars; or (2) your actual car payments during the ensuing five years after filing divided by 60. (Debtors who purchase expensive cars with large car payments increase their ability to pass the means test eligibility for Chapter 7. If your car is owned free and clear you deduct the standard ownership and operating expenses.)

Other Expenses. Debtors may also deduct from their CMI actual expense for categories the IRS specifies as “other necessary expenses.” These expenses include, but are not limited to, the following:

  • child care
  • federal income tax withholding
  • medical and dental expenses including medical insurance for debtor’s family (debtor’s without health insurance may buy insurance before filing to help pass the Chapter 7 means test)
  • term life premiums
  • alimony, child support, and other court ordered payments
  • care of elderly or disabled dependents
  • health savings accounts
  • actual expenses for food and clothing up to 5 percent above the IRS allowance

Secured Debt Payments. Payments due secured creditors, such as scheduled home mortgages and car loans during the five years after the bankruptcy filing date. This amount also includes required payments to creditors secured by personal property such as appliances or furniture.

Priority Debts. Required debts such as taxes or domestic support obligations.

Debtors are allowed to deduct the greater of either the IRS local housing allowance or the total of actual mortgage payments plus allowed home maintenance expenses, such as utilities. For cars, you can deduct either secured debt payments or the IRS car allowance, whichever is greater.

Your current monthly income, less your allowed expenses summarized above, is your Net Monthly Income (NMI) which is a defined term under the new bankruptcy law. If your NMI is more than $166.66 per month, you fail the means test which means there is a “presumption of abuse” applied to your filing a Chapter 7 bankruptcy. If your NMI is between $100 and $166, the law applies a mathematical formula to determine substantial abuse of a Chapter 7 bankruptcy.

As stated above, eligibility for Chapter 7 bankruptcy under the new bankruptcy law requires a detailed computer analysis with software designed for means test calculations.

Failing the means test means there is a “presumption of abuse” and you cannot file a Chapter 7 bankruptcy, but you may be able to overcome that presumption if special circumstances call for an adjustment to your income or expenses. Some examples of possible “special circumstances” are job loss or pay cut, a serious medical condition, or unusually high child care expenses. To establish that your financial situation is a special circumstance that warrants a waiver of the means test formula, you will have to show that your expenses incurred are reasonable and that you have no reasonable alternative. Judges are given discretion to determine if special circumstances allow filing a Chapter 7 bankruptcy by a debtor who cannot pass the means test formula.

Jon Alper

About Jon Alper

Jon is an attorney focusing on bankruptcy and asset protection in Orlando, Florida.