What is bankruptcy means testing?
Bankruptcy means testing is a mathematical formula used by bankruptcy attorneys to determine what type of bankruptcy relief a debtor can receive. Means testing was created by congress with the help of the credit card lobby to prevent bankruptcy abuse. The most likely mistake potential bankruptcy clients make is to first go online, late at night when they can’t sleep, and try to do means testing online. 95 percent of all San Diego residents who file bankruptcy wouldn’t fit the means test requirements online but still, qualify for bankruptcy. 0The bankruptcy means test is all about the math and how you put it together.
Means testing will determine if you can first even be considered as a candidate for a Chapter 7 bankruptcy, or if instead, you may be required to use a Chapter 13 case. This is an income-based means testing, and debtors who have income above the median income of their state are subject to the unpleasant limitations imposed by the Means Test. However, the analysis doesn’t end there; from the income on the Means Test, one gets to take certain deductions.
- Taxes: You can deduct your tax obligations from your income on the means test as well.
- Involuntary deductions: Deductions required for employment such as mandatory retirement plans, union dues, or uniforms.
- Health, disability, or term life insurance
- Secured debt payments These include payments on secured debts such as your mortgage or car loan. Even if your mortgage or car payment is above the national or local living standards, you can normally deduct it in full on the means test.
- Court-ordered payments: If you are required to pay domestic support obligations such as alimony or child support, you can deduct these expenses on the means test.
- Child care: Expenses for child care such as babysitting, daycare, or preschool.
- Health care: If you incur more out-of-pocket health care costs (other than insurance) for you or your dependents than the allowed national standard, you may be able to deduct the actual amount you pay.
- Education for employment or disabled child: You can deduct your education expenses if those expenses are required for your employment or for your mentally or physically disabled child.
- Charitable contributions: If you regularly made charitable contributions prior to bankruptcy and expect to continue making those contributions, you can deduct them on the means test.
- Care of elderly, chronically ill, or disabled: You can deduct the amount you contribute towards the care of an elderly or disabled family member or person in your household.
The Means Test determines if a bankruptcy petition must be assigned a “Presumption of Abuse” by the court. If your petition is assigned a presumption of abuse status, you must prove that your bankruptcy petition is not “abusive” or fraudulent. The rule of thumb so far, in practice, is that if the Means Test result is that “The Presumption of Abuse Arises,” it is extremely unwise to try and file the case as a Chapter 7. A bankruptcy attorney can properly do the Means Test for you and let you know what your options are. It’s a bad idea for you to rely on the so-called “Online Means Test Calculators” because the test is highly complex. The key to a thorough, accurate Means Test is not just getting in all the required income; it’s knowing how to apply bankruptcy law in figuring out how to maximize the allowable deductions. That is why just having a calculator isn’t going to do the trick.