The bankruptcy means test is often the starting point for anyone who is filing for bankruptcy. It determines if you are eligible for Chapter 7 bankruptcy, and impacts your plan length in Chapter 13 bankruptcy. The means test is a complicated form, and mistakes are common. Read on to find out what some of the most common mistakes are in completing the means test.
(For background information, start by reading The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy? )
Some people forgo filing for Chapter 7 bankruptcy because their income is too high to pass the means test when in reality, they weren’t required to take it in the first place. You’ll be able to bypass the means test if you fall into one of the following categories:
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?
Unlike a filer with primarily consumer debts, a filer whose debts are mainly business related (more than half) is exempt from the means test. Here’s how to tell whether your debt qualifies as consumer or business debt:
- Business debt. If you or a business borrowed money or purchased goods on credit with the intent 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. If you took out a loan or used credit for your individual needs—for instance, you bought food or clothing, paid rent, or participated in some form of recreation—the debt will be a consumer debt.
Determining the type of debt is usually straightforward; however, sometimes the rules can lead to unexpected results. For instance, back taxes are business debt. By contrast, mortgage debt is consumer debt. As a result, many business people holding a business as a sole proprietor must file a consumer bankruptcy (and pass the means test) because mortgage debt often makes up the majority of a sole proprietor’s debt—even when the bulk of their remaining debt arises from the business.
Additionally, some courts have found that student loans qualify as business debt. Given the significant student loan balances carried by many people, some higher-earning individuals who wouldn’t usually qualify for Chapter 7 bankruptcy might be eligible to discharge (wipe out) other qualifying debt. So, even though student loans aren’t dischargeable in most cases, a high-income filer could avoid a Chapter 13 payment plan and instead, wipe out credit card balances, medical bills, and personal loans in a matter of months, thereby freeing up additional funds to pay the student loan obligation.
If you’re not sure whether your debt is consumer or business in nature, it’s advisable to contact a knowledgeable bankruptcy attorney. A bankruptcy lawyer will tell you how your local court views your particular debt and explain which bankruptcy chapter is best for you.
Determining the right household size to use can be tricky especially since the courts tend to disagree on this. A small number of courts take the extreme view that you count everyone who is living in your house (sometimes referred to as the "heads on beds" approach). Other courts have included only those occupants who are financially dependent on the debtor.
Your household size can have a significant impact because it is used to determine:
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 member of the household. By contrast, a boarder who rents a room in your house but pays only rent and doesn’t contribute further towards expenses and doesn't share family resources, wouldn’t usually be counted as a member of the household (but you’d have to include the rent as income).
(For more information, see Household Size and the Chapter 7 Means Test)
The income you list on your means test form must match your income documentation. The number of weeks in a month or the paycheck issuance date can affect your six-month average income figure enough to impact whether or not you are eligible to file for Chapter 7 bankruptcy. The same can hold true when determining whether you need to make Chapter 13 payments over three years or five.
You should also examine your financial documentation for any other sources of income during the period. One-time payments are easily missed but should be counted towards your income.
Child support is income only if you are receiving it. You should not list child support that is supposed to be paid to you but is not, as income. You also cannot list child support as an expense if you are not paying it.
Generally, you list the standard housing deduction and then adjust it on a different line to claim the mortgage payment amount you actually pay. If you don’t plan to keep your house and are surrendering it to the mortgage holder, you can only take the standard housing deduction. You cannot adjust it to match the mortgage payments that you will no longer make. (Because this issue has been debated in the past, consider consulting with a local bankruptcy attorney about the practice in your jurisdiction.)
401K, retirement account contributions, and 401K loan repayments are some examples of expenses which aren’t deductible. Cell phones are included in the standard utility deduction and are not separate. College expenses for your child aren’t deductible, but education expenses as a condition of your employment would be.
Make sure you take all allowable deductions. Payments you make under court order, such as in a divorce or custody case, are allowable deductions as other deductions even if the expense would not otherwise be allowable. Also, if taxes and insurance aren’t escrowed as part of your mortgage payment, you need to remember to list these amounts separately.
You can and should take advantage of the marital adjustment deduction if your spouse is not filing for bankruptcy with you, but you need to make sure that expenses that are part of the marital adjustment deduction are not listed again as ordinary deductions.
(For more information on the marital adjustment deduction, see Marital Adjustment Deduction on the Bankruptcy Means Test)