Can I see some examples of the Chapter 7 “Means Test”?

In every Chapter 7 case where the primary debt is consumer in nature, a means test must be performed. The actual document filed in the Chapter 7 bankruptcy case is called “Statement of Current Monthly Income and Means Test Calculation.” (Official Form B22A) The means test is a product of the Bankruptcy Reform Act and is found at 11 U.S. C. § 707(b). This statute is complex and ambiguous and there will -- no doubt -- be litigation over the precise contours of the means test requirements for many years to come.

In any event, in its simplest expression, if the debtor's "current monthly income" is more than the state median, an analysis must be performed to determine if the Chapter 7 filing is presumptively abusive. Abuse is presumed if the debtor's aggregate current monthly income over 5 years, net of certain statutorily allowed expenses, is more than (i) $10,000, or (ii) 25% of the debtor's nonpriority unsecured debt, as long as that amount is at least $6,000. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income. Unless the debtor overcomes the presumption of abuse, the case will generally be converted to chapter 13 (with the debtor's consent) or will be dismissed.

The "current monthly income" received by the debtor is a defined term in the Bankruptcy Code at 11 U.S.C. § 101(10A) and means the average monthly income received over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from nondebtors and including income from the debtor's spouse if the petition is a joint petition. The definition of current monthly income does not include social security (but does include other kinds of pension/disability income).

What does all of that mean? It means that there are many non-obvious cases where it can only be determined if a person is within the means test criteria by careful analysis by competent counsel. Depending on the location of the debtor, the median income and the allowed expenses/deductions will change. For instance, in my area of California, there are 4 different counties within 10 miles of San Francisco. The amount allowed under the means test for rent expense varies by a substantial margin from the lowest (Alameda = $1,368) to the highest (Marin=$1,786). These numbers vary over time; the current actual numbers can be found on the United States Trustee’s Means Testing website.

MANY PEOPLE EXCEED THE MEDIAN INCOME BUT PASS THE MEANS TEST. It requires careful income analysis, knowledge of the allowed expenses and deductions, knowledge of types of debt including priority and non-priority unsecured debt, and what is allowed secured debt.

The means test is not for the timid. You have perhaps seen the commercial disclaimer, “Professional driver on a closed course, DO NOT TRY THIS AT HOME”. This should be a warning on every means test.

Below you will find some real life examples of the Chapter 7 means test:

EXAMPLE #1 - High Income (over $110k) Single Debtor with Child Support

Debtor is a renter with a household size of one and has current monthly income of $9,712.32. This equates to gross income of $116,547.84 on an annualized basis – far in excess of the median family income for a Californian of this household size. He owns one car with a payment. This debtor has a court ordered child support payment of $3,509 per month. He was also in arrears on this child support by $59,207.42 and owed the Franchise Tax Board $7,077.74 for recent taxes. After taking into consideration the ongoing child support payments, taxes due, payments for priority claims (mostly for back child support) and permitted deductions for living expenses (for a person residing in San Francisco, California), he had allowed expenses of that exceeded his income. Despite the high income, this debtor passed the means test.

EXAMPLE #2 - Single and $80k plus Income with Home Mortgage

Debtor lives alone and has current monthly income of $6,770.83. This equates to income of $81,249.96 on an annualized basis. Similar to example one, this person resides in San Francisco, California but has no car payment. However, this debtor owns his home and has permitted deductions for debt payment of $3,505.38 per month. Under this circumstance, the debtor passed the means test.

EXAMPLE #3 - Renter with Over $60k Income and 10 Year Old High Mileage Car and $200 Monthly Health Care Expenses

This debtor has current monthly income of $5,114.55. This equates to income of $61,374.60 on an annualized basis. This person is a renter in Santa Clara County, California who lives alone. Under the applicable expense tables, this different county of residence necessitates slightly different deductions for national and local expenses. As this debtor has an older car with no payment, he is permitted a slightly different expense structure under the emerging law and rules for transportation expenses including maintenance and operation. He owns no home and has no child support payments like the first two examples (which represent rather large expense deductions). However, he has $200 in monthly out of pocket expenses for dental services and prescription drugs that are not paid by insurance. This debtor passed the means test.