I Have a Large Mortgage Payment. Can It Help Me on the Means Test?

Having a large mortgage can help you pass the Chapter 7 bankruptcy means test. Here's why.

If you have a large mortgage payment, you typically have a better chance of passing the Chapter 7 means test than a debtor who rents. This is because the means test allows you to deduct your entire mortgage payment to reduce your monthly disposable income. Here is how it works.

(To learn what the Chapter 7 means test is, how it works, and more, see the articles in The Chapter 7 Means Test.)

You Can’t Pass the Means Test If You Have a Lot of Disposable Income

Chapter 7 is designed to provide a fresh start for people who can’t afford to pay back their unsecured creditors. The role of the means test is to determine whether you should be allowed to file for Chapter 7 bankruptcy.

If your income is greater than the state median for a similar household, you need to show that your expenses don’t leave you with any disposable income to pay unsecured creditors. However, the means test uses national and local living standards for most expenses so you are not allowed to deduct many of your actual expenses to accomplish this.

Debtors Who Rent Are Limited to the Local Housing Expense Allowance

On the means test if you don’t own a home and make mortgage payments, you can only deduct the amount of your local housing expense allowance. This figure is based on the average housing costs where you live. This means that even if your rent is higher than the local standard, you can’t use it to qualify for Chapter 7. This is why being a homeowner and having a mortgage can help you pass the means test (discussed below).

You Can Deduct Your Actual Mortgage Payment on the Means Test

Unlike debtors who rent, you can deduct your entire mortgage payment on the means test. You are not limited to the local housing allowance because the means test has a separate area where you can deduct your payments for secured debts (such as your mortgage).

As a result, if your mortgage payment is greater than the local housing allowance, the extra portion can help you reduce your disposable monthly income and pass the means test.

How to Calculate Your Deduction Based on Your Mortgage Payment

The means test determines the monthly mortgage payment you are allowed to deduct by averaging the total amount that will come due during the five years after you file for bankruptcy. So if your mortgage will be paid off in less than five years, you may not be allowed to deduct your entire mortgage payment on the means test. However, for most people this is not a problem because their mortgage payment will continue for a lot longer than five years after their bankruptcy.

Example. Christina’s mortgage payment is $2,500 a month. She still has 20 years before her mortgage will be paid off. The standard local housing allowance where she lives is only $1,800. However, since Christina’s mortgage payment is higher than the local housing allowance, she can deduct her actual mortgage expense. This gives her an extra $700 to further reduce her disposable income. As a result, she has a better chance of passing the means test and qualifying for Chapter 7 bankruptcy than a debtor with the same income who rents.

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