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Bankruptcy Basics: Means Test - A Basic Understanding

One of the most significant and challenging changes to the U.S. Bankruptcy Code that was went into effect on October 17, 2005 was the implementation of the "Means Test" as a pre-requisite for filing for bankruptcy protection.  I am not going to get into the truly technical aspects of the means test, of which there are many, but rather seek to give you a basic overview of what it is.  To determine how the means test effects your ability to file for bankruptcy protection, you truly need to consult with an experienced Chicago bankruptcy attorney.

The means test was implemented by Congress in an effort to create a standardized base to determine eligibility to file for bankruptcy protection.  The general theory is to determine your annual household income and then compare that to a standardized "median family income" number for a household of similar size based on tables provided by the Census Bureau.  The most important initial factors in completing the means test are your household size and your current monthly income. 

Your household size may seem pretty obvious, but it is not always so.  Clearly you include yourself, your spouse (assuming they are living in the same household) and minor children.  Questions arise as to whether you can include your elderly parents, your children who are away in college, your down on their luck sibling who has moved in with you, etc.  Determining an accurate household size can be vital, however, as the more people legitimately included in the household, the higher the median income standard is and the more likely it is that you will qualify for the relief you seek. 

Once the household size is accurately determined, the next hurdle is to determine the current monthly income.  The starting point of this calculation is very simple; you take the last six calendar months of actual gross income received in the household, average that to a monthly amount, multiply it by 12 months and that is your current monthly income.  There are sources of income that are specifically excluded from the current monthly income calculation, most commonly being Social Security Income, and allowable reductions of gross income by expenses incurred, such as business expenses for the self-employed and real estate costs for investment properties.  You are required to include income from a non-filing spouse in the current monthly income calculation, but only to the extent that the spouse's income is actually contributed to the household.

With the current monthly income calculated, it is then compared to the Median Family Income table for your household size.  If your income is lower than the Median Family Income, then you are an "under-median" debtor in bankruptcy and have a lot of flexibility as to what chapter of bankruptcy you can file and, if you choose to file for Chapter 13 bankruptcy protection, how your plan is structured.  If your current monthly income is higher than the Median Family Income, then you must proceed with a whole series of calculations to determine your "disposable monthly income" and your flexibility in a Chapter 13 bankruptcy is significantly reduced.  The implications of being a an "under-median" or "over-median" debtor in bankruptcy will be discussed in later blog entries.

It should be noted that there are exclusions to the requirement of the means test as a whole.  The two most common exclusions are for those individuals whose debts are not primarily consumer debts (usually those with significant business debts) and for those individuals who are actively serving in the U.S. military.  It should also be noted that significant aberrations in income, such as severance packages, unusual bonuses, etc, can arguably be removed from the current monthly income calculation by a good bankruptcy attorney.

If you are considering filing for bankruptcy protection in the Chicago area, you need to ensure that you have an experienced bankruptcy attorney representing you who knows all of the technical aspects of the means test.  Before the implementation of the means test, filing for bankruptcy was much less technically demanding and many attorneys could successfully represent individuals filing for bankruptcy protection while focussing their practices on other areas of law.  Not anymore.  These days, if you want the job done right, you need an attorney who truly focusses their practice on bankruptcy.  At Ledford & Wu, all we do is bankruptcy and consumer rights and we do it well.  Call us for a free consultation today.

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