What is the Secondary Bankruptcy Means Test?

Austin, Texas, Board Certified Bankruptcy Lawyer

Individuals whose debts are primarily consumer debts and whose CMI is above the median income for a family of your size in your state are subjected to the secondary means testing analysis. Since the passage of bankruptcy reform, many credit card companies and debt collectors have been promoting the myth that bankruptcy is not available anymore. These scare tactics are being employed to discourage debtors from seeking legal advice. Even some media sources have incorrectly reported that Chapter 7 bankruptcy has been eliminated for persons that earn more than the median income. These reports are completely false.

The truth is that persons that earn more than median income will be subject to full bankruptcy means testing. The process will be more complicated. The legal cost will be higher for persons above the median income line. However, with proper legal counseling, most persons that fall above the median income line will still qualify for Chapter 7 bankruptcy. Good legal counseling is now absolutely crucial. The means test requirement will limit the availability of Chapter 7 bankruptcy relief for some high income earners. This detriment is more than offset with the expanded incentives the new law provides for persons choosing to file under Chapter 13 of the Bankruptcy Code.

For example, under the old law, voluntary contributions to retirement accounts were not allowed as a deduction from income in determining how much disposable income you have available to pay creditors in a Chapter 13 plan. This restriction favored employees fortunate enough to be the beneficiaries of defined benefit retirement plans and discriminated against people whose employers offered only 401(k) plans. Today, under the new law, you may contribute the full amount your employer’s plan allows and the contribution will not be counted as disposable income for purposes of computing your Chapter 13 plan payment.

The main feature of full means testing is that your allowable expenses are determined partially in accordance with the expenses specified in the IRS Collection Financial Standards. For some expenses, the amount that you actually spend is irrelevant. Absent a showing of special circumstances, the maximum amounts specified in the IRS standards will determine the permissible expense deductions for food, clothing, personal care, housing, utilities, and transportation costs. The means testing process permits you to "deduct" the full amount of some additional expenses listed below. The following are some of the additional permitted expenses together with an explanation of their effect on the means test:

(1) Mortgage Payments. Assuming you have more than 60 months remaining to pay on your mortgage, you are permitted to deduct the full amount of your mortgage payment, including escrow for property taxes and insurance. We adjust the payment up in the event you do not have an escrow account set up on your mortgage. High income earners with high mortgage debt are more likely to qualify to file under Chapter 7. High income earners that either rent, have low mortgage payments, or no mortgage payments, are more likely to have the presumption of abuse arise in their cases. The Bankruptcy Code promotes home ownership because it is more likely that a high income debtor will qualify for Chapter 7 if he has a $3,000 per month mortgage payment than he is if he has a $3,000 per month rental payment.

(2) Vehicle Payments. The secondary means testing analysis allows you to take your actual vehicle payment multiplied by the number of months remaining to be paid on the note and divided by the arbitrary number 60. If the result is greater than the maximum amount specified in the IRS standards, then you are permitted to deduct that amount, even though this amount may be less than your vehicle payment. If the result is less than the maximum amount specified in the IRS standards then you are permitted to deduct the higher IRS standard. Single filers are limited to expenses allowed for one vehicle. Joint filers are limited to expenses allowed for two vehicles per household. High income earners with high car payments are more likely to qualify to file under Chapter 7. High income earners that rent their vehicles, have low car payments, or have no car payments at all, are more likely to have the presumption of abuse arise in their cases.

Caution: The U.S. Trustee closely scrutinizes cases if it appears that a debtor purchases a new vehicle immediately prior to filing bankruptcy for the sole purpose of “passing” the means test. Your case can be dismissed for abuse even if you pass the means test. This does not mean that it is impermissible to purchase a new vehicle shortly before filing bankruptcy. Consult a board certified bankruptcy attorney before you make any major decisions.

(3) Non-Dischargeable Taxes and Support Payments. A portion of any debts owed for unpaid taxes or support obligations may be deducted. Therefore, high income earners that owe large amounts of non-dischargeable tax debts or support payments are more likely to qualify to file under Chapter 7. High income earners that either have little or no debt for unpaid taxes or support obligations are less likely to qualify.

(4) Court Ordered Payments. Court ordered payments for support, the repayment of criminal restitution obligations, or other obligations are fully deductible. High income earners that have large monthly court ordered obligations for support or criminal restitution are more likely to qualify to file under Chapter 7. High income earners that have little or no court ordered obligation to pay support or criminal restitution are less likely to qualify.

(5) Miscellaneous Ongoing Expenses. Congress has determined that certain types of expenditures are good for society and has made them fully deductible for purposes of means testing. High income earners that make the following types of investments are more likely to qualify to file under Chapter 7 than those who have little or no expenses in the following categories: (1) life insurance; (2) health insurance; (3) health savings accounts; (4) disability insurance; and (5) charitable contributions.

Most people will not be able to prepare the required means testing form without the aid of an attorney. To properly prepare the form, you will need to calculate your exact income and the exact amount spent on certain expenses during the six month time period before the anticipated bankruptcy filing. You will also need to be able to obtain the median income and expense data from proper sources. There are CMI calculators available on the internet that may provide a good place to start but do not assume that you will not qualify for Chapter 7 just because the calculator shows that you do not pass the means test. Likewise, just because you pass the means test does not mean your case will not be dismissed for abuse.

Free Consultation: Contact Board Certified bankruptcy attorney Fred E. Walker in Austin, Texas, for a debt relief consultation. There is no cost or obligation.