Means Test

The Means Test is used to determine if an individual debtor whose debts are primarily consumer debts qualify for Chapter 7 relief.  In theory, the test is used to determine the debtor’s ability to pay his debts and therefore his need for Chapter 7 relief.  The schedules completed by the debtor containing the required information will determine if there is a presumption of abuse.  If there is a presumption of abuse, and absent special circumstances, the Chapter 7 will be dismissed or with the consent of the debtor converted to Chapter 13.

The calculation of the test is in two parts.  First there is a determination of the debtor’s household income for the six month period preceding the bankruptcy.  For this purpose, income is gross income determined without regard to deductions for tax withholdings, union dues, insurance, etc.  Social Security benefits are not included as income for this purpose.  This is the six full months prior to the bankruptcy filing, therefore if for example the bankruptcy is filed in August, the debtor would exclude the partial month of August and use the six month period beginning February 1 and ending July 31.  The debtor’s household income includes the debtor’s income, the debtor’s spouse’s income (whether or not they are filing) and the income from other people (e.g. a parent) paid on a regular basis for the household expenses of the debtor and his dependents.   

In the first calculation the annualized current monthly income for the household is compared to the median family income applicable to the debtor’s state and household size.  In the event the annualized current monthly income for the household is less than  the median family income applicable to the debtor’s state and household size, then there is no presumption of abuse. 

In Kentucky, the median family income for various household sizes are (as of March 15, 2009) as follows: 

*Add $6,900 for each individual in excess of 4. 

In Indiana, the median family income for various household sizes are (as of March 15, 2009) as follows:  

*Add $6,900 for each individual in excess of 4. 

In the event that debtor’s annualized current monthly income for the household is greater than the median family income applicable to the debtor’s state and household size, then debtor must complete the second part of the Means Test to determine if there is a presumption of abuse.  In the second part of the Means Test, the debtor’s current monthly income is reduced by the allowable monthly expenses to arrive at the debtor’s projected monthly disposable income.  The debtor’s projected monthly disposable income is then extended to a 60 month period to determine if there is a presumption of abuse.  For example, if the debtor’s projected monthly disposable income is $200, then the 60 month projected monthly disposable income is $12,000.

In the event the debtor’s 60 month projected monthly disposable income is less than $6,000, there is no presumption of abuse.

In the event the debtor’s 60 month projected monthly disposable income is more than $10,000, there is a presumption of abuse.

In the event the debtor’s 60 month projected monthly disposable income is between $6,000 and $10,000, there is a presumption of abuse if the amount is greater than 25% of all nonpriority unsecured debt. 

The allowable monthly expenses used to reduce the current monthly income is a combination of IRS allowable expenses, payments required to be made on secured obligations and payments made on priority obligations. 

The IRS allowable expenses include some which are national standards such as food, housekeeping supplies, apparel, and some which are local standards such as vehicle cost, mortgage or rent expenses, utilities, etc. and other necessary expenses such as union dues, child care, etc.

The allowable deductions for secured debt include mortgage payments (both 1st and 2nd) and car payments. 

Priority obligations include such items court ordered domestic support obligations, including child support, alimony, etc. 

Totality of circumstances.