What is the Means Test?

 

     This is the test that determines whether an individual can file a Chapter 7 bankruptcy instead of a Chapter 13 case.  Prior to 2005, high-income individuals (including entertainers, producers, Wall Street executives, and professional baseball players) could file a Chapter 7 bankruptcy, but the Bankrutpcy Court could decide to dismiss the case if the judge felt they made too much money or had too lavish a lifestyle to be able to walk away from all of their debts.  Now, the bankruptcy judge has less discretion in the matter.  The Bankruptcy Code now has a mathematical formula for determining whether a person makes too much money to file a Chapter 7 case.  This is the means test.   

How do I know if I satisfy the means test?
 
     The Internal Revenue Service calculates and publishes the median incomes earned by everyone on a state by state basis according to household size.  Except for certain exempt people, each Chapter 7 debtor must determine whether his or her gross income less certain allowed expenses is above or below the median income for their household size as reported by the IRS. This is done on a Statement of Current Monthly Income and Means Test Calculation.  If the debtor’s adjusted income exceeds the median income, a presumption of abuse arises by law under the new Bankruptcy Code.
There is a second test the debtor can go through to determine whether they are eligible for a Chapter 7 bankruptcy.
These days, you can make a lot less than many Hollywood entertainers, financial whiz kids and and professional sports figures but still not satisfy the means test.

     The only debtors who do not have to satisfy the means test are disabled veterans, reservists, National guard members, and debtors whose debts are primarily non-consumer (business) debts.

What kinds of debts are considered to be business debts?
 
     Since debtors who have primarily business debts do not have to satisfy the means test, it is worth figuring out whether your debts are primarily business debts.

     The Bankruptcy Code defines “consumer debt” as debt incurred for personal, family, or household purposes.   ”Business debt” is not defined in the Bankruptcy Code.   Lacking a technical definition, the bankruptcy courts consider the intention of the debt at the time it was incurred, not the nature of the debt at the time the bankruptcy case is filed.  So, if the debt was incurred for a reason that did not involve a personal, family or household purpose, then it probably is a “business debt.”

     The debtor’s intention is determined at the time the debt was incurred.  For example, if the debtor incurred a mortgage loan to buy a home, then, later, he or she started renting the house out for income, the mortgage loan is a consumer debt because it was incurred for personal use, not as a real estate investment.

     If the debts reported on the bankruptcy petition and schedules are primarily non-consumer debts (i.e. business debts), the debtor does not need to satisfy the means test.  Most courts interpret “primarily” as meaning “more than one-half.”

Are tax debts considered to be consumer debts or business debts?

     Many people filing bankruptcy have unpaid taxes, including unpaid personal income taxes.  Since tax debts were not debts that were originally incurred for personal, family, or household purposes, most courts consider tax debts not to be consumer debts.