To qualify for Chapter 7 bankruptcy, you must pass the "means test." If you are married and your spouse is not filing for bankruptcy with you, you will have to deal with a controversial aspect of the means test, the marital adjustment deduction. This deduction becomes important if your non-filing spouse has significant income, which would otherwise disqualify you from filing under Chapter 7 bankruptcy.
The Chapter 7 means test aims to limit Chapter 7 bankruptcy to those who can't pay their debts. If your income is higher than your state's median income, you deduct specific monthly expenses from your "current monthly income" (your average income over the six calendar months before you file for bankruptcy) to arrive at your monthly "disposable income." The higher your disposable income, the more likely you won't be allowed to use Chapter 7 bankruptcy.
When married, your non-filing spouse's income is still included in your means test, even if separated and living in separate households. If your non-filing spouse has significant income, it could mean you don't qualify for Chapter 7 bankruptcy.
However, you might be able to counteract your spouse's high income by using the marital adjustment deduction.
Two parts of the means test allow you to deduct expenses from your income. If your allowable expenses are high enough, it is more likely that you will qualify for Chapter 7 bankruptcy. These two sections are:
In Part 2 of the means test, you deduct normal household expenses, such as the mortgage payment for your house, utilities, and groceries. You do not claim these as part of the marital deduction in Part 1, even if your non-filing spouse pays them.
However, in Part 1 of the means test, you can deduct any amounts your non-filing spouse uses to pay for personal expenses separate from household expenses. These expenses are called marital deduction expenses.
As a result of claiming the deduction, the amount of your spouse's income used in the means test is reduced to just that portion used to contribute to paying the household expenses.
To learn about the different sections of the means test and the information you must provide, see the Chapter 7 Means Test Forms.
While the courts are not all in agreement, below are some items that might qualify as valid marital adjustment deductions. Many of these could not be deducted in the regular part of the means test if the couple filed a joint bankruptcy petition.
Make sure you are not claiming the same expenses twice. An expense should appear either in Part 1 or in Part 2, but not in both sections.
For example, if you file income tax returns jointly with your spouse, payroll deductions for income tax would not be included in the marital adjustment deduction because they are already included in the household expense deductions.
If your non-filing spouse's income is significant and you claim a large marital adjustment deduction, the Chapter 7 bankruptcy trustee or U.S. Trustee will likely examine the deductions carefully.
This means that you should have documents demonstrating that the expenses exist and that your spouse has been paying them in the amounts you have claimed for the deduction. If you can't support their existence, the court could disallow some or all deductions.
If the court disallows enough deductions to make you ineligible for a Chapter 7 bankruptcy, your bankruptcy could be dismissed. And if the court finds that you intentionally provided false information on your paperwork, you could be subject to criminal penalties and fines.