The Means Test

As your San Diego Bankruptcy attorney I need to make you aware of the means test and how it applies to you.

The Means Test is a test to determine if you make too much money to declare Chapter 7 Bankruptcy.

You only are only subject to the means test if your debts are mostly consumer as opposed to business debts. Your credit card debt is probably consumer debt unless you made the charges for business purposes. Home mortgage counts as consumer debt. Most taxes are considered non-consumer debt.

Most people I see in my office have mostly consumer debt so they are subject to the means test.

The Means Test works like this:
Means test step 1: Your income is compared to the median income for a similarly‑sized family in California.
If your income is less than the median income then you are not considered ineligible to file a Chapter 7 bankruptcy ‑ no Step 2.

Means test step 2: But if your income is more than the median income then you have to go to Step 2. In Step 2 you subtract expenses from your income to see if you have anything left. If you have any more than a few dollars left over you are presumed to be ineligible to file a Chapter 7 bankruptcy. This is called a “presumption of abuse.”

You might be thinking “That’s no problem. I can show plenty of expenses.” But for certain expenses (such as housing and transportation) you aren’t allowed to deduct your actual expenses. For these expenses, you are only allowed to deduct the allowed expenses. These are the government thinks you should have rather than the expenses you actually have.
You can check out this government site to see how much you are allowed to deduct for housing, transportation, etc.

You can check the United States Trustee’s position on most of the issues arising under the chapter 7 means test here

What if your actual rent is lower than the IRS standards? the answer is you get to deduct the IRS standards.  You’re not limited to the actual amount.  11 USC Sec 707(b)(2)(A)(ii)(1)
You might be thinking that your monthly mortgage payments are higher than the amount allowed as a deduction and wondering what you can do about that.
At the time I write this, according to the IRS Local Standards, a family of 4 in San Diego County receives a deduction for mortgage payments of $1,908.00. But what if your mortgage payments are $3,500 per month and you plan on staying in the house after declaring bankruptcy? If you only are getting a deduction of $1,908.00 but your monthly mortgage payments are $3,500 your disposable income would seem to be overstated by $1,592.00.

Fortunately, there is a solution. In addition to the deduction for housing, you are also allowed a deduction for future payments on secured debt. The debtor may deduct from current monthly income the total of all amounts contractually due to all secured creditors in the 60 months following the filing of the bankruptcy case, divided by 60.

This means you can deduct from your monthly disposable income the total of all the mortgage payments that will be due in the next 5 years divided by 60.
You might be wondering:

“I understand that I can deduct the payments on my home mortgage that will be due in the next 60 months. What about my car payments?

There is a deduction for ‘ownership expenses”.  The main expense of ownership of a vehicle is the cost of paying the purchase price.  There is a separate category of costs termed “operating expenses”  The means test allows you to deducted the IRS guideline amount of around $450 per month per vehicle.  (up to 2 vehicles).  The means test also allows you to deduct around $525 per month for ownership expenses (to the extent they exceed the amount deducted as a payment on a secured debt.)  If you lease your vehicle you get to take that deduction also.  But what if your vehicle is paid for and you don’t make monthly payments. Under RANSOM v. FIA CARD SERVICES, N. A., FKA MBNA
AMERICA BANK, N. A. you don’t get to take the ownership deduction unless you are making a monthly purchase or lease payment.

As stated above, you may deduct from your current monthly income the total of all amounts contractually due to all secured creditors in the 60 months following the filing of the bankruptcy case, divided by 60. It doesn’t matter what the property is that is securing the debt. Although there may be a problem if the property is a luxury item.

Also if you are behind on your mortgage, you can deduct from your current monthly income 1/60th of the past due amount on your home mortgage. But you are not allowed to deduct the past due amount of the rental property you own. The reason is that the property securing the debt (collateral) must be necessary for the support of the debtor or debtor’s dependents (e.g., primary residence, motor vehicle).

In the case where only one spouse is filing, you might be wondering if the non-filing spouse’s income is considered when completing the means test. The answer is that only that portion of the non-filing spouse’s income that is contributed to the household is considered. For example, if the non-filing spouse pays $500 per month to an ex-spouse then that would be deducted. Things like haircuts, gym memberships, personal lunches should be deducted as well. The fact that only a portion of the non-filing spouse’s income is considered on the means test can make it advantageous for only one spouse to file.

You can take the Means Test online for free by going to one of the online Means Test sites.

You might be thinking: “I think I pass the means test but I am not completely sure? What happens if we file for bankruptcy but the court concludes that I flunked the means test?”
The answer is that the court may dismiss your case. You may be given the option to switch your case to a Chapter 13.

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