Congress requires that I disclose that our firm is a “debt relief agency” under the Bankruptcy Code. We help people file for bankruptcy relief under the Bankruptcy Code. As with all articles on this website, the contents of this article are not intended as legal advice for any specific legal problem. Nothing in this article is intended to create an attorney-client relationship between the author and the reader. The author is licensed to practice law in Nebraska only. If you are considering filing bankruptcy in a state other than Nebraska you are encouraged to consult with an attorney licensed in the state in which the bankruptcy case will be filed.
In 2005 Congress adopted the “means” test to determine, in part, eligibility of an individual consumer debtor to qualify for a Chapter 7 case. If the individual debtor fails the means test the individual debtor has to file a Chapter 11 or Chapter 13 case. The primary distinction between a Chapter 7 and either a Chapter 11 or 13 is that in a Chapter 7 the debtors file their case, a trustee is appointed and the debtors receive their discharges, all in about 90-120 days from the date of filing. In a Chapter 13 or 11 case, the debtors propose a plan to repay part or all of their debt over time. In a 13, the debtors may propose a plan for a minimum of 36 months and a maximum time of 60 months. In an 11, the debtors have more control over the duration of the plan, but normally the debtors must commit their disposable net income for a 3-5 year period to payments under the plan.
The means test applies to debtors whose debts are primarily consumer debts. The test is based on the total amount of debt at the time the case is filed. Thus, if a debtor operated a failed business, and if the total amount of the business debt (including contingent liability as a guarantor of business debt) exceeds the debtor’s consumer debt (home loan, car loan, credit card debt) the debtor does not have to satisfy the means test to file a Chapter 7. A common problem with business debtors is that they use their credit cards for business purposes and do not keep adequate records to prove what part of the debt is business debt. It may be possible for debtors to allocate some part of the debtors’ credit card debt to the debtors’ business, but if challenged by the US Trustee’s office the debtors have to have some proof that the debt is a business debt. The US Trustee has taken the position that expenses incurred for investment purposes, such as improvements on rental properties, are not non-consumer debt. In most cases, our firm runs a means test analysis on all individual debtors—if they pass the test then the question about whether the debt is primarily consumer or not consumer is irrelevant.
Entities, such as corporations and limited liability companies, do not have to comply with the means test.
The means test looks at the historical gross income of the debtors for the 6 months prior to the month in which the case is filed. The debtors need to provide data on their wages, any interest, investment, rental or other income. Income such as child support, alimony and unemployment compensation are all included in the means test analysis. If the gross income for the debtors exceed the median income for Nebraska, then the analysis shifts to the permitted deductions. The median income for Nebraska can be viewed at this link:
https://www.justice.gov/ust/eo/bapcpa/20150515/bci_data/median_income_table.htm
At the time of this writing, the median income for a family of two in Nebraska is $61,369. The median income is adjusted periodically.
If the debtors have commission income or income that varies by season, the debtors may have to wait to file bankruptcy until their income falls below the median income.
Failing the income portion of the means test is not the end of the analysis. If the debtors’ income exceeds the median income then the debtors’ expenses and the expenses permitted by the IRS are used to determine whether the debtors have sufficient income to fund a Chapter 13 plan. The expenses include:
- Mortgage payments
- Any arrearages on the mortgage
- Tax withholding
- Health insurance
- Uninsured healthcare expenses
- Child support/alimony
- Car expenses
- Car insurance
- Education expenses for a physically or mentally challenged child or for minor children
- Childcare expenses
If the expenses are high enough, the debtors may still qualify to file a Chapter 7 case. If the expenses are not high enough to use up the debtors’ income, then the debtors have to file a Chapter 13 or Chapter 11 (if the debtors’ debt is too high [1] for a Chapter 13).
The means test is fact dependent, so any person considering a bankruptcy case should consult with a bankruptcy attorney to determine their eligibility to file a Chapter 7.
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[1] The debt limits on Chapter 13 cases are: $383,175 for unsecured debt (this includes any unsecured portion of a secured debt) and $1,149,525 for secured debt. If debtors have more unsecured or secured debt than the limits for a Chapter 13, they must file a Chapter 11 if they do not qualify to file a Chapter 7.
Trev E. Peterson
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