The Means Test, formally called the Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income, has two main purposes:
1) To determine one’s eligibility to file Chapter 7 Bankruptcy. And if one is not eligible;
2) To determine the amount of money paid to your general unsecured debts in a Chapter 13 bankruptcy. (Unsecured debts are debts owed to creditors that don’t have liens or security interest in property, personal or real property. A few examples of unsecured debts are medical bills, credit cards, signature loans, deficiencies on foreclosed homes or repossessed vehicles, pay day loans, etc.)
The means test compares a household’s income and expenses to that of a household of the same size in the same state and also takes into consideration local cost of living.
First, you have to define a household. A household is everyone who lives with the person or persons who are filing Chapter 7 or 13 Bankruptcy. Generally, this is everyone that is a dependent or spouse of the filing party. In some cases a dependent can be an adult.
Next, you have to determine all income coming in from all sources to the household, and all necessary deductions from this income such as taxes and benefits.
Then, you have to define expenses. The test uses IRS standard expenses for what is considered necessary for the household to keep a roof over their head, vehicles to get members of the household to and from work, food, utilities, etc. Since not all households are exactly the same and fit these standards, the Bankruptcy Court allows additional or increased expenses as long as they are necessary for the health and welfare of the household. See IRS Standards Transportation Utilities Health Care
If there is nothing left after the expenses are subtracted from the income, then the person filing is typically eligible for Chapter 7 bankruptcy.
If there is a certain percentage of money left over after subtracting the expenses from the income, then the person has to file a Chapter 13 and pay this amount back to their creditors.
This is a very basic description of a means test. Every household’s test is different and other factors have to be evaluated in each case. People often call that tried to do their own means test and tell me they can or can’t file a Chapter 7 and it’s the opposite. So, please, to find out more about a means test and how it applies to your specific situation, please call and schedule a free consultation with our office. With our experience, we can tell you if you qualify for a Chapter 7, or if you need to file a Chapter 13 bankruptcy, approximately what your monthly plan payment would be. We will complete your means test, even if it’s complicated, for free, so that you can know your options.