Bankruptcy Means Test in a Nutshell
The “means test” is a combined work of fact and fiction. It is not based on actual current income and actual expenses. Instead it is based on your income of the past six months and IRS national averages for most of your expenses such as utilities, food, rent, etc. Some expenses use actual numbers such as mortgage payments and car payments but for the most part, it’s a congressional work of art that purports to determine if you can afford to pay back your creditors through a Chapter 13 bankruptcy.
The means test was adopted because the credit community was able to convince congress that there was rampant abuse in Chapter 7 bankruptcy filings. This “perceived” abuse resulted in every bankruptcy Chapter 7 case having to “pass” the means test in order to file a Chapter 7 bankruptcy. That would be great if the means test used actual expenses and actual income – but it doesn’t. If you don’t “pass” the means test, then bankruptcy law assumes that an "assumption of abuse" exists. Whether an assumption of abuse exists will determine whether you can file a Fort Lauderdale Chapter 7 bankruptcy. With that said, most people will pass the means test and have the option of filing a Chapter 7 bankruptcy in Fort Lauderdale.
If you don’t pass the means test and qualify for a Chapter 7 bankruptcy, the means test is still very important because if you have monthly income left over according to the test’s fictional expenses – that may determine the minimum monthly amount that you have to pay creditors in a Chapter 13 bankruptcy. Either way, it’s important that you get an affordable Pembroke Pines bankruptcy attorney that knows how to ace the means test!
The Chapter 7 means test applies to those primarily have “consumer debts” such as credit cards, car debt, or mortgages. Debtors whose debts are primarily business debts do not have to take the means test and may file Chapter 7 bankruptcy regardless of their income and expenses.Why the Means Test is Part Fact and Part Fiction
- Your “ability to pay” is not based upon actual income and actual expenses. Instead, it is based on a phony backward-looking budget dreamed up by Congress to determine how much you should pay creditors, requiring calculation of Current Monthly Income (CMI) & Disposable Income.
- Because IRS national averages are used in calculating the means test - “Projected Disposable Income” in Chapter 13 is not a true picture of actual monthly funds left over after subtracting “reasonable expected monthly expenses” from projected monthly income.
- “Current Monthly Income” does not mean current actual income – it means past income that may no longer exist.
- “Disposable Income” – a debtor’s deemed “ability to pay” is primarily based upon past income and expense “allowances”, not actual income and expenses.
- “Disposable Income” in a Chapter 13 bankruptcy may not be the debtor’s monthly amount actually available to pay into the plan.
The Chapter 7 "means test" is a two-part test. The first part of the Chapter 7 bankruptcy means test compares your family's income and allowable expenses to the official median income for households in Florida. The median income number adjusts according to the size of your household. If your income is less than the median family income, then you pass with flying colors! If your income is more than the Florida median income for your family size, it doesn't mean that you won't qualify for a Chapter 7 Bankruptcy. It just means that you have to move on to the second step of the Chapter 7 means test to figure out your disposable income.
In the second step, you will deduct allowable expenses (based on IRS national standards) to determine your disposable income. Your disposable income is presumed to be available to pay general unsecured creditors. Then you multiply that number by 60 to determine how much disposable income you'll have over the next five years.Determining "Means Test" Disposable Income
To arrive at your "disposable income," you may deduct the following expense categories from your CMI:The Fictional Expenses on the Means Test
- Standard Living Expenses. You can deduct an amount of "standard living expenses" established and published by the IRS. Debtors may claim documented living expenses up to 5 percent above the IRS standard if such expenses are "reasonably necessary."
- Housing Expenses. The IRS local standards housing allowance is different for each county in Florida. It also varies depending on your household size. The IRS publishes "local standards" of transportation and housing expenses. The local housing allowance is different for each county in Florida. It also varies according to your household size. The housing allowance includes the estimated cost of home ownership and operating expenses such as utilities and taxes. If you have a mortgage, you are also allowed to deduct the amount of mortgage payments due. However, if you are paying a mortgage, the local housing allowance will be reduced by the amount of its assumed ownership expense so that your mortgage payments are not counted twice in the means test formula. Renters are limited to the IRS local standard allowance regardless of how much they are actually paying.
- Transportation Expenses. Transportation expenses are comprised of two separate expense categories: "operating expenses" and "ownership expenses." Operating expenses are standard published expenses which vary according to the number of cars owned and your location. Your deductible ownership expense is computed as the higher of (1) the IRS national standard ownership allowance based on the number of family cars; or (2) your actual car payments during the ensuing five years after filing divided by 60. Debtors who purchase expensive cars with large car payments increase their ability to pass the means test eligibility for Chapter 7. If your car is owned free and clear you deduct the standard ownership and operating expenses.
- Other Expenses. Debtors may also deduct from their actual expense for categories the IRS specifies as "other necessary expenses." These expenses include, but are not limited to, items such as:
- child care;
- tax withholding
- medical and dental expenses including medical insurance for debtor's family (debtor's without health insurance may buy insurance before filing to help pass the Chapter 7 means test);
- term life premiums;
- energy costs;
- private school tuition up to $125 per month per child;
- alimony, child support, and other court order payments;
- care of elderly or disable dependents;
- health savings accounts;
- internet and phone service (including cellular phones);
- actual expenses for food and clothing up to 5 percent above the IRS allowance.
- Secured Debt Payments. You may deduct secured debt payments such as home mortgages and car loans during the five years after the bankruptcy filing date. This amount also includes payments on debts secured by personal property such as appliances or furniture.
- Priority Debts. Non-dischargeable debts such as taxes or domestic support obligations.
- Education Debts. Reasonable and necessary private school educational expenses up to $1,500 per child per year.
You are allowed to deduct the greater of either the IRS local housing allowance or the total of actual mortgage payments plus allowed home maintenance expenses, such as utilities. For cars, you can deduct either secured debt payments or the IRS car allowance, whichever is greater.Fort Lauderdale Chapter 7 Means Test Summary
By now you may be scratching your head and asking yourself "what did they just say?" The means test can be complicated and hard for most people to understand. That's why you need an experienced Broward County bankruptcy lawyer that knows how to ace the means test. Bankruptcy laws are in place to help prevent abuse of the system. In reality, you do not need to fear the means test.
The Bankruptcy Law Firm of Orfelia Mayor is a debt relief agency in Broward County that loves what they do! We help people file for bankruptcy under the bankruptcy code. Make our day by letting us help you stop wage garnishment, stop foreclosure sales, stop car repos and just get you back into loving life! Your creditors have lawyers on their side – shouldn’t you have a lawyer too?
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