What Makes the Means Test “Mean”?

The most notable change of Bankruptcy Reform in 2005 and probably the most criticized was the inception of the Means Test. A Debtor can no longer fill out a simple expense form and show they cannot pay their debts. They must now qualify using standard expenses from data tables provided by various government agencies with various collection practices.

Debtors often express that these expense tables are unfair, out-dated, inaccurate, and that when comparing households, one size does not fit all. When Means Test results prohibit the filing a Chapter 7 bankruptcy, I have gone through the form line by line, listening to clients vehemently argue that the expenses they are required to use are substantially lower and don't represent an average household.

The test was supposedly created to prevent bankruptcy abuse, and force those that can pay, to pay. The institution and purpose of the test doesn’t really have any bite without the data that really determines your outcome. So where does this “mean” data come from?

Very simply put, the monthly amount a Debtor can afford to pay to creditors is calculated as follows: The Debtor's average monthly income is reduced by a set of allowed expenses specified by Internal Revenue Service (IRS) and compared to similar households based on data from the Census Bureau. What remains is considered income available to pay back debts. (Again, this is very simply put.)

Part of the IRS standards called the national standards, comprised of food, housekeeping supplies, apparel and services, personal care products and services, and miscellaneous, are derived from data collected by the Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES). The CES randomly selects households to voluntarily participate and states that each household surveyed actually represents as many as 15,000 other household. This data was primarily collected for use in calculating the Consumer Price Index (CPI), a key indicator in the country’s inflation and overall economic health, not for use determining ability to pay debt back. The BLS web site actually explains why some of their expense data may be lower than it really is! “Because not all consumer units purchase each item during the survey period, the average expenditure for an item is generally considerably lower than the expenditure by those consumer units that purchased that item.” (From http://www.bls.gov/cex/csxfaqs.htm#q13)

The figures provided by the Census Bureau for state median household income, which your household is compared against, comes from their annual "American Community Survey". The survey randomly selects 3 million addresses each year to participate, with around 2 millions responses, to answer questions about demographic, housing, social, and economic information. The data that is currently used in the means test was collected in 2010. There is a movement that this survey is a violation of the right to financial privacy which causes one to question if the sample of those that actually fill this out is truly random, and who they really being compared to.

As reminded by the CES Survey, the intent of collecting this data by the various agencies is not for bankruptcy purposes, so pointing a finger in their direction is a bit unfair. But that doesn’t change that these improperly applied statistics are what makes the means test so “mean”.

To read more about The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, visit , or read the actual text at http://www.gpo.gov/fdsys/pkg/PLAW-109publ8/pdf/PLAW-109publ8.pdf

For detailed information on the means testing data and collection practices, visit the following sites:

National Standards - http://www.irs.gov/businesses/small/article/0,,id=104627,00.html

State Median Family Income - http://www.census.gov/hhes/www/income/data/statemedian/index.html Bureau of Labor Statistics (BLS) Consumer Expenditure Survey (CES) - http://www.bls.gov/cex/home.htm