Bankruptcy Means Test
If you’re trying to file a chapter 7 bankruptcy, you must first qualify. One of the qualifications is that you must pass the means test. The means test is a mathematical formula designed to prohibit those from filing a chapter 7 bankruptcy if they have the ability to repay a portion of their debt over time. If you are making under the state median based on your household size, then you will automatically pass the means test. However you must not have available money per month from your budget from which to pay a repayment plan. If you are over the state median for your household size, then you must submit to the bankruptcy means test.
How The Test Works
The bankruptcy means test is going to take all of your income, expenses and budgetary items and align them with the IRS allowances. If it turns out that you are spending more than what the IRS allows, your budget items will be reduced to that of the IRS standards. Based upon those numbers, the means test will spit out a completed report with either a passing grade or a failing grade. If you failed the means test, there will be a dollar amount by you failed indicated. So for example if you fail the means test by $250, you will not be eligible for a chapter 7 unless you can make adjustments to satisfy that dollar amount.
Recent Example
Recently, clients of mine came to see me for chapter 7 bankruptcy and they did not pass the means test at the time. They were simply not taking the right amount of deductions out of their paycheck. Their gross pay as compared to their net pay was not where it should have been. This couple was not taking enough of a deduction, receiving huge tax refunds every year. Once the clients made the proper deductions, they were able to pass the means test. Keep in mind that the means test takes into account your gross income as well as your state and federal tax deductions. It was only after my clients corrected their allowances where they were actually able to pass the means test.
Cutting Back On Income
In some cases, I will find a client who will not pass the means test because they are working two or more jobs with significant overtime. There is no reason for a client to kill themselves with over time and multiple jobs in an effort to survive only to realize that this conduct has prevented them from obtaining a fresh start under chapter 7. In those cases, the client is free to cut back on work or reduce the overtime in an effort to qualify for chapter 7. This is not gaming the system. This is not taking advantage of existing laws. This is simply doing what they need to do in order to obtain a fresh start. It is not bad faith to reduce your hours or to stop working overtime or a second job if doing so is going to help you obtain a fresh start for yourself and your family.
For more information on this complicated bankruptcy means test, you can contact the office at 847-520-8100. We have offices in Chicago Loop, Chicago Beverly, Aurora, Waukegan, Joliet, Westchester, and Wheeling.
