Home>What is the “Mean’s Test”?

What is the “Mean’s Test”?

June 28, 2022

By Diane Drain Attorney & Retired Law Professor

The “Mean’s Test” is a formula that assesses whether a person applying for bankruptcy has enough income to cover all of the allowable expenses, plus enough money to pay non-priority, unsecured creditors like credit cards.

The means test is a method devised by Congress to determine who is qualified to apply for bankruptcy under Chapter 7. People with incomes below the state median and debts that are predominantly not consumer obligations are exempt from the means test. This indicates that if 51 percent or more of the debts are commercial obligations, the potential debtor will not be subject to the means test.

The Debtor must calculate their “current monthly income,” which includes any money from spouses, rents (less costs), bonuses, and any “assistance” from family or friends. Allowable living expenditures and secured and priority debt payments are deducted from total income to arrive at a net income or monthly disposable income that can be utilized to pay down unsecured non-priority debts. If the net income, multiplied by 60, is larger than (1) either 25% of the nonpriority unsecured claims or $6,000, or (2) greater than $10,000, the chapter 7 can be contested. The debtor may be forced to convert the case to a chapter 13 or risk losing all bankruptcy protection. §707(b).

Basically, if a debtor can pay $100 per month to their unsecured creditors, their chapter 7 bankruptcy may be challenged. This law is interpreted differently by different courts.

To comprehend the Mean’s Test, you must first understand a few terms.

It is not current, monthly, or income. Instead, it’s your family’s entire income for the previous six months, plus monthly gifts and donations from others toward household expenses. Social security, maybe unemployment (to be assessed by a court), and benefits to war crimes/terrorism victims are not included in income. §101(10A). The total current monthly income is then deducted from the allowed expenses. The IRS Standards and 707(b)(2)(A)(ii) specify the expenses that are allowed. This last figure is referred to as the Debtor’s “monthly disposable income.” To assist you in gathering this information, our office will provide you with a form.

After calculating “monthly disposable income,” the Debtor must compare it to the median family income in the Debtor’s state.

The Debtor may file a chapter 7 if his or her “monthly disposable income” is less than the median family income. However, continue reading to the next paragraph.

Comparison of Schedules I and J:

Even though the Debtor passed the net current monthly income test, if the Debtor’s real monthly income, minus the allowable monthly costs, is greater than an unstated sum (which is not clearly defined), the Debtor may still have difficulty filing a chapter 7. When a Debtor has been unemployed for numerous months in the last six months, but suddenly earns more than is required to pay the allowable expenses, this situation can arise.

If the court concludes that the Debtor should not be in Chapter 7, the Debtor or their counsel may be sanctioned for reimbursement of the Trustee’s reasonable attorney fees expended in prosecuting the case. (Rule 9011 and 707(b)(4)(A)).

By |Published On: June 28th, 2022|Last Updated: July 28th, 2022|

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Diane L. Drain - Bankruptcy LawyerDiane is a well respected Arizona bankruptcy and foreclosure attorney. As a retired law professor, she believes in offering everyone, not just her clients, advice about bankruptcy and Arizona foreclosure laws. Diane is also a mentor to hundreds of Arizona attorneys.

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