The “Mean’s Test” is a formula that determines whether the person filing for bankruptcy protection has enough income to pay the expenses that are allowed, plus extra money to pay to non-priority, unsecured creditors such as credit cards.
The means test is a formula established by Congress to determine who may be eligible to file Chapter 7 bankruptcy. People under their state’s median income and people whose debts are primarily not consumer debts are exempt from means test qualification. This means if 51% or greater of the debts are related to business obligations then the potential debtor does not need to worry about the means test.
The Debtor must calculate their “current monthly income”, including all income from spouses, rents (minus expenses), bonuses, plus “help” Debtor has been receiving from family or friends. Allowed living expenses and payment of secured and priority debts are subtracted from the total income for a net income or monthly disposable income that could be used to pay unsecured non-priority debts. The chapter 7 can be challenged if the net income, multiplied by 60, is greater than (1) either 25% of the nonpriority unsecured claims or $6,000, or (2) greater than $10,000. The Debtor may be required to convert the case to a chapter 13 or lose the bankruptcy protection completely. §707(b). Basically, if the debtor can pay $100 per month to their unsecured creditors, then they may face a challenge to their chapter 7. Only time will tell what the law really means.
To understand the Mean’s Test you must first understand some of the terms:
Current monthly income before taxes – it is not current, monthly or income. Instead, it is the total income received by your family for the last 6 full months, plus regular gifts and contributions by others toward household expenses. Income does not include social security, perhaps unemployment (to be determined by a court), and payments to war crimes/terrorism victims. §101(10A). Allowed expenses are then deducted from the total current monthly income. Allowed expenses are in §707(b)(2)(A)(ii) and the IRS Standards. Refer to this final number as the Debtor’s “monthly disposable income”. Our office will provide you with the form to assist with gathering this information.
Once “monthly disposable income” is calculated, the Debtor must compare it with the median family income for the Debtor’s state of residence.
If the “monthly disposable income” is less than the median family income, then the Debtor may file a chapter 7. But, see the next paragraph.
Comparison of Schedule I and J:
If the Debtor’s real monthly income, minus the allowed monthly expenses, is greater than some unstated number (usually in the range of $200 to $300) the Debtor may still have a problem filing a chapter 7, even though the Debtor passed the net current monthly income test. This situation could occur when a Debtor has been unemployed for several months of the last 6 months, but now earns more than needed to pay the allowed expenses.
If the court determines that the Debtor should not be in a chapter 7, it is possible that the Court can sanction the Debtor, or their attorney, for reimbursement of the Trustee’s reasonable attorney fees incurred in prosecuting the action. (§707(b)(4)(A) and Rule 9011).