New Federal Law Allows Families to Deduct ABLE Contributions on the Bankruptcy Means Test

At the end for 2014, Congress created a new tax-free savings vehicle, called an ABLE (Achieving a Better Life Experience) account, designed to assist families in saving money for the support of individuals with disabilities. The accounts work like college savings accounts.

At the end for 2014, Congress created a new tax-free savings vehicle, called an ABLE (Achieving a Better Life Experience) account, designed to assist families in saving money for the support of individuals with disabilities. The accounts work like college savings accounts. The ABLE Act permits states to set up programs for such accounts (just as they do for the college savings accounts) and then those accounts will enjoy the federal tax benefits. At the same time, Congress amended the bankruptcy code so that contributions to ABLE accounts can be deducted from the Chapter 7 bankruptcy means test. (Get more details on ABLE accounts.)

If your income is higher than the median income in your state and you want to file for Chapter 7 bankruptcy, you have to pass the “means test.” The means test looks at your income and expenses and determines if you can repay a certain portion of your unsecured debt in a Chapter 13 bankruptcy. If you can, then you cannot file for Chapter 7. The more expenses or deductions you can subtract from your income, the more likely you are to pass the means test.

With the new law in place, families that make contributions to ABLE accounts that are in line with IRS contribution levels (for 2015 that amount if $14,000 per individual) can deduct those contribution amounts from their income for purposes of the means test. This means that families can more easily meet the Chapter 7 qualification standards while still being allowed to sock away money for their disabled loves ones. (To earn more, see Can contributions to an ABLE account for a disabled child help me pass the Chapter 7 bankruptcy means test?)