In 2005 Congress made some major changes to the Bankruptcy Code. The most onerous requirement became known as the Means Test. That test was so burdensome that many attorneys quit filing bankruptcies. Others limited their clients to those who easily passed the test. Over the last 6 years, attorneys have become more comfortable with the test. We don’t like it, but we deal with it. My cynical view of the test is that it does little more than increase the attorneys fees needed to file a case. I can complete a Means Test in as little as 10 minutes or it can take over an hour. This discussion may take some of the mystery out of this test.
This test consists of three parts. The first part looks strictly at gross monthly income for the previous 6 months. Income includes any money coming into the household. That includes wages, commissions, bonuses, dividends, self employment gross income, retirement type income, alimony or child support, most disability income, contributions from family members, and other sources of income over the prior 6 months. Social Security income and welfare benefits normally are not included in the calculation, but must be disclosed. If the combination of this income is less than the average for your family size, the test ends and you pass. If you are above the average, the second part of the test kicks in.
The second part of the test allows you to deduct various expenses. This is the most time consuming part of the test. There is a long laundry list of expenses that can be deducted from your income. This can be a little tricky. You want this to be calculated by an experienced bankruptcy attorney. The deductions might also depend on the type of bankruptcy you intend to file. If your adjusted income is now below the adjusted median, you may be able to file a Chapter 7 or a Chapter 13. If you are still above, the third part of the test comes into play. This is the reason why it is important to hire a reliable bankruptcy attorney san diego.
The third part of the test is very easy. If your excess monthly income is less than $200 you may be able to file Chapter 7. Otherwise you might need to file Chapter 13 or 11.
One problem with the means test is that it assumes that your income for the previous 6 months is a good predictor of the future. The test creates what is referred to as your disposable monthly income (DMI). This is the amount you presumably have available each month to pay your unsecured creditors. This may be true if there was no disruption in income. However, frequently, you are filing bankruptcy because your income has dropped substantially. Does this mean you cannot file bankruptcy or must pay an amount to your creditors that you cannot afford?
The Means Test creates a presumption. If you have no disposable monthly income, the Code presumes that you cannot pay your bills and are not abusing the Code by filing bankruptcy. If you have excess income (DMI), the presumption is that you can pay something toward your unsecured creditors.
A presumption is a starting point. If you file Chapter 7 and the test indicates that you have DMI, the United States Trustee is obligated to investigate and may file a Motion to either dismiss your case or convert it to Chapter 13. If you file a Chapter 13, the Chapter 13 Trustee may ask that you plan payment include the DMI as a payment to your unsecured debts.
The good news for you is that the presumption of abuse can be overcome. We take a proactive approach in these cases. In a Chapter 7, we prepare a declaration signed by you that attempts to overcome the presumption of abuse. It may include supporting documents to establish that you no longer have any disposable monthly income. In Chapter 13 we invoke a United States Supreme Court case, Hamilton v. Lanning, that allows us to base you Plan payment on your current income and expenses, rather than the projected DMI. We might also delay filing the case if it helps us reduce your average income.
The bad news on the presumption is that Trustee may still challenge your case even if you pass the test. That may occur if you income substantially changes for the better. I have seen several cases where the Trustee objected to a case because the client received a high paying job shortly before the case was filed.
Since the Means Test can determine whether you can successfully file bankruptcy you must provide your attorney with as much information about your income and expenses as possible. I would rather have too much than too little. I can be creative, but I will not be dishonest. In addition, you will sign, under penalties of perjury, that every document you file is true and accurate.