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How Does a Means Test Apply to Chapter 7 Bankruptcy?

How Does a Means Test Apply to Chapter 7 Bankruptcy?
"""One of the requirements for registering for chapter 7 bankruptcy is to submit a 'Means Test' and a Current Monthly Income report to the bankruptcy court. A means test is a three-step mathematical calculation performed on a worksheet of income and expenses to ensure that individuals do not abuse the bankruptcy system. If a chapter 7 debtor qualifies at any phase of the three-step calculation, he or she is automatically eligible for chapter 7 protection, subject to other conditions. The three-step formula is as follows:

i) Initial Step: Median Income Test ii) Subsequent Step: Means Test Calculation
iii) Multiply unsecured non-priority debt by 25% in Step 3.

Step 1: Test of the Median Income

The initial step of the chapter 7 procedure is to compare the debtor's current monthly income to the'state median income.' The US Census Bureau determines the median income for each of the fifty-two states in the United States and publishes this report annually. The mean test for each individual is determined by the debtor's state of residence and number of dependents. The median income is then compared to the debtor's current monthly income (CMI). If the debtor's current monthly income is less than the state's median income, the presumption of system abuse is invalidated and the debtor is eligible to petition for chapter 7 protection.

Consequently, what factors are included in the calculation of Current Monthly Income? The CMI is calculated based on the average monthly income received from all sources during the six months preceding the bankruptcy petition, with the final calculation occurring on the last day of the month preceding the filing. CMI includes the following earnings:

* Net revenue of a business (after expenses have been deducted)
* Interest, dividends, and royalties * Pensions and retirement income * Gross wages (before taxes), including salaries, gratuities, bonuses, and overtime.
* Unemployment benefit not covered by social security
* Rental and other income from property * Child support or spousal support

Second Step: Means Test Calculation

Step 2 must be calculated if the chapter 7 debtor's current monthly income is greater than the state median income. The current monthly income of the debtor is reduced by some standard expenses and qualified personal expenses. Here is a list of possible deductions from CMI:

* Childcare support costs, including court-ordered alimony and child support payments
* Monthly average federal, state, social security, self-employment or Medicare taxes * Contributions to a 401(k) plan, work uniform expenditures, and union dues
* IRS local standard for mortgage or rent expense reduced by the difference between the 60-month average versus actual mortgage expense * IRS local standard for accommodation and utilities expenses excluding mortgage (see above).
* National IRS standard for food, clothing, domestic supplies, miscellaneous personal care expenses, and other personal care expenses.
* Phone expenses incurred to maintain the debtor's health and welfare, including cell phones, internet service, call waiting, voicemail, caller ID, and more.
* Health insurance costs of the debtor that are not covered by a health savings account. * Education expenses necessary for the debtor to maintain current employment or for a physically or mentally dependent child.
* IRS Transport standard for ownership and lease expenses minus the average actual secured vehicle payment over 60 months""

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"How Does a Means Test Apply to Chapter 7 Bankruptcy?" was written by Mary under the Finance / Wealth category. It has been read 253 times and generated 1 comments. The article was created on and updated on 01 June 2023.
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