In every Chapter 7 case where the primary debt is consumer in nature, a “means test” is part of the analysis. “Failing” the means test creates a “presumption of abuse” that must be overcome or risk conversion to a Chapter 13 or dismissal of the case. Sometimes cases will fall into a gray area where the debtor fails the means test but still able to hold on to the Chapter 7.
In its most simplified form, we take average monthly income from all sources received over the prior six months and subtract authorized expenses to determine if there is sufficient money left over such that the debtor should not be permitted a Chapter 7.
Means testing can be really complex as some income is excluded and some non-obvious things like “regular contributions of support” are included. Small changes such as car ownership or the county of residence may change the formula. Secured debt such as a car loan is favored under the means test and completing a purchase prior to filing may make the difference. Other times, waiting to file a case until after a car is repossessed or a house foreclosed and there is no more secured debt may kill the opportunity for some people to file cleanly under a Chapter 7.
I have seen many people wrongly put into Chapter 13s because the thought they failed or could not overcome the means test. This is one reason to seek out a San Francisco Bankruptcy Attorney with the necessary expertise.
Below are some real life examples of the Chapter 7 means test in action from my files:
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. This equates to gross income of $116,547 on an annualized basis. He owns one car with a payment. This debtor has a court ordered child support payment of $3,509 per month. He also had child support arrears of $59,207 and owed the Franchise Tax Board $7,077 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. 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 per month. 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. This equates to income of $61,374 on an annualized basis. This person is a renter in Santa Clara County and lives alone. He has a 10 year old car with no payment and $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.
By: Marty Courson