Common Mistakes Made on the Bankruptcy Means Test

Here are some of the most common mistakes people make on the bankruptcy means test.

By , Attorney · University of the Pacific McGeorge School of Law

Completing the bankruptcy means test accurately, and avoiding mistakes is crucial because it's often the starting point for anyone filing for bankruptcy. The bankruptcy means test determines Chapter 7 bankruptcy eligibility. In Chapter 13 bankruptcy, the bankruptcy means test impacts your plan length and the amount you'll pay creditors. In this article, you'll learn about:

  • qualifying for bankruptcy Chapters 7 and 13
  • identifying potential bankruptcy means testing mistakes, and
  • avoiding bankruptcy means testing altogether.

Because the means test is a complicated form, the simplest way to avoid common means test problems is by consulting with a local bankruptcy lawyer.

Qualifying for Bankruptcy By Passing the Means Test

Most people think of the means test as the form completed when determining Chapter 7 bankruptcy eligibility. But you'll complete means test forms in Chapter 13, too. Here are the basic differences.

Using the Means Test to Qualify for Chapter 7 Bankruptcy

The Chapter 7 means test forms, along with your income and expense schedules, determine whether you qualify for Chapter 7 bankruptcy. You won't be eligible if your documents reveal that you have "disposable" income to pay some or all of your debt.

Find out whether you're eligible for Chapter 7 bankruptcy.

Using the Means Test to Determine Chapter 13 Bankruptcy Responsibilities

In Chapter 13, you'll propose a Chapter 13 plan to repay your creditors. You'll need enough income to cover all the amounts you must pay creditors. The Chapter 13 means test tells you two things:

  • whether you'll pay for three or five years, and
  • how much you can afford to pay nonpriority unsecured creditors.

Your nonpriority unsecured creditors hold debts like credit card balances, medical bills, back rent, lease payments, and utility bills. They even include your home and car lender if you return the home, car, or other collateral to the lender.

The Chapter 13 means test measures how much you can afford to pay these creditors because these are the debts you get a break on in Chapter 13 bankruptcy. You remain responsible for paying for everything else.

Learn if you qualify for Chapter 13 bankruptcy.

How to Avoid Making Bankruptcy Means Test Mistakes

You'll want to get your deductions right on the means test because when you're taking it in Chapter 7, each deduction reduces your income giving you a better opportunity to qualify. In Chapter 13, deductions reduce the amount you'll have to pay creditors in your Chapter 13 plan.

Remember that every deduction takes money from creditors, so go lightly on expenses that would seem unfair for them to pay. For instance, the bankruptcy trustee appointed to your case would likely view clothing for an unemployed adult child capable of holding a job with skepticism.

Common Bankruptcy Means Test Mistakes to Avoid

Here are a few general rules to help you avoid unwanted means test scrutiny.

1. Don't Take Deductions That Aren't Allowed

Not everything you pay each month is deductible on the means test. You won't be able to claim 401K, retirement account contributions, 401K loan repayments, and voluntary earnings deductions. Cell phones are included in the standard utility deduction and aren't separate. College expenses for your child aren't deductible, but education expenses as a condition of your employment would be.

2. Don't Pad Your Deductions

Don't be tempted to fluff up your expenses on the means test. For instance, if you don't have receipts showing you tithe 10% without fail, don't claim it. Pass up the public transportation deduction if you don't use the bus, train, or other public transportation regularly. The trustee will look for unusual expenses and ask you to show proof.

Learn about when the trustee suspects fraud.

3. Don't Forget Deductions You're Entitled to Take

Even though it's prudent to be cautious with deductions, be fair to yourself. Remember to list taxes and insurance not included in your mortgage payment. Payments you make under court order, such as in a divorce or custody case, are allowed even if the expense wouldn't be otherwise. You'll also want to list your spouse's housing expenses if you're married but living in separate residences.

4. Don't Use the Wrong Household Size

Determining the number of people in your household can be tricky, especially since the courts tend to disagree. A few courts take the extreme view that you count everyone living in your house, but you'll have to include their income, too. Other courts have included only those occupants financially dependent on the debtor.

A good rule of thumb is to consider whether the occupants are in some way financially interdependent and form one economic unit. For example, an elderly parent who lives with the family would be a household member. A boarder who rents a room but doesn't contribute further towards expenses would not, and you'd include the rent as income.

Learn more about household size and the Chapter 7 means test.

5. Don't Miscalculate Income

The income you list on your means test form must match your income documentation. The paycheck issuance date can affect your six-month average income figure and impact Chapter 7 eligibility. It can also change whether you must make Chapter 13 payments over three years or five. Also, examine your financial documentation for any other sources of income during the period. It's easy to miss one-time payments that count toward your income.

6. Don't List Child Support Owed But Not Received

Child support is income only if you're receiving it. You shouldn't list child support that's supposed to be paid to you but isn't as income. You also can't list child support as an expense if you aren't paying it.

7. Don't Forget Your Spouses' Separate Expenses

You can and should take advantage of the marital adjustment deduction if your spouse isn't filing for bankruptcy with you. List any expenses unique to your spouse that you don't benefit from and that reduce the household income.

8. Don't Take the Means Test Unnecessarily

Past business owners and some military members don't need to take the means test when filing for Chapter 7 bankruptcy. So before you get started, check whether you're even required to take the means test. Here's when you can skip it:

  • You're filing a business bankruptcy because your business debt exceeds other debt.
  • You meet military service guidelines, such as being a disabled veteran or reservist.

The criteria for both exclusions appear on Statement of Exemption from Presumption of Abuse Under § 707(b)(2) (Form 122A-1Supp), the form you'll complete to demonstrate that you're not required to take the means test.

What Is a Business Bankruptcy?

You're a business filer if more than half of your debts are business related. Here's how to tell whether your debt qualifies as consumer or business debt:

  • Business debt. If you borrowed money or bought goods and services on credit to make a profit, then the debt is a business debt. You'll incur these bills while engaging in a money-making endeavor.
  • Consumer debt. Consumer debt is personal. A loan or credit used for your individual needs, for instance, food or clothing, rent, or recreation activities, will be consumer debt.

Surprising Business and Consumer Debt Categories

Sometimes the business debt rules can lead to unexpected results. Specifically, watch out for back taxes, mortgage debt, and student loans. For instance, back taxes are business debt, but mortgage debt is consumer debt. So if you're a sole proprietor with a hefty mortgage that exceeds your business debt, you might have to take the means test.

Also, some courts have found that student loans qualify as business debt. This rule allows higher-earning individuals with student loans to "discharge" or wipe out other qualifying debt in Chapter 7 bankruptcy.

Meet With a Local Bankruptcy Lawyer

This small list of things that could go wrong with the means test is just the beginning. Some rules change with the circumstances and differ between jurisdictions and courts.

For instance, after the 2008 great recession, many bankruptcy filers were in the process of losing homes due to foreclosure. Although they had a hefty mortgage payment, they weren't paying it and intended to let the house go back to the bank.

Some bankruptcy trustees began questioning the legitimacy of deducting a mortgage on the means test when the filer was no longer making the payment. The rules developed differently depending on the court and jurisdiction.

The takeaway is a bankruptcy lawyer will recognize established and emerging issues and have insight into how your bankruptcy court will handle those issues.

Need More Bankruptcy Help?

Did you know Nolo has been making the law easy for over fifty years? It's true—and we want to make sure you find what you need. Below you'll find more articles explaining how bankruptcy works. And don't forget that our bankruptcy homepage is the best place to start if you have other questions!

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We wholeheartedly encourage research and learning, but online articles can't address all bankruptcy issues or the facts of your case. The best way to protect your assets in bankruptcy is by hiring a local bankruptcy lawyer.

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