What is the “Means Test”?
The Means Test is a method crafted by Congress to make a determination as to an individual’s or couple’s ability to repay debt by comparing the filer’s combined household income to federal, state, and county averages.
The Chapter 7 Means Test is used to determine a filer’s eligibility to file Chapter 7 bankruptcy.
The Chapter 13 Means Test is used to calculate the filer’s minimum payment plan term and the monthly income available to fund the payment plan.
The Chapter 7 Means Test is used to determine a filer’s eligibility to file Chapter 7 bankruptcy.
The Chapter 13 Means Test is used to calculate the filer’s minimum payment plan term and the monthly income available to fund the payment plan.
The Chapter 7 Means Test
In Chapter 7 the Means Test is used to determine whether there is a “presumption of abuse” and has two steps:
Step 1. The filer’s combined household income is compared to the Census Bureau’s calculation of “Median Family Income” for the state where the filer resides. For cases filed for North Carolina residents, the “Median Family Income” calculations as of November 1, 2020 are:
| 1 person household | $50,653.00 |
| 2 person household | $66,044.00 |
| 3 person household | $72,069.00 |
| 4 person household | $88,942.00 |
| -add $9,000.00 for each person over 4. | |
Combined household income is calculated based upon gross income for the six month period before filing, which is converted to an annual income. If the filer’s combined household income is less than the applicable median family income, the “presumption of abuse” does not apply and the filer may file Chapter 7 bankruptcy without completing Step 2.
Step 2. If the filer’s combined household income is greater than the applicable median family income the filer may still qualify for Chapter 7 bankruptcy if the filer’s “disposable monthly income” is less than the applicable median family income. The “disposable monthly income” is calculated by taking certain deductions from the gross combined household income determined in Step 1. Some deductions are based upon federal, state, or local averages, others are based upon the filer’s actual expenses. Examples of allowed deductions include:
| Food, Clothing, Personal Care expenses |
| Health Care expenses | |
| Housing Payments and Utility expenses | |
| Vehicle Payments and Operation expenses | |
| Taxes, Child Care, and Education expenses | |
| Telephone and Internet expenses | |
| Health, Disability and certain Life Insurance expenses | |
Subtracting the allowable deductions from the gross combined household income results in the “disposable monthly income”. If the filer’s disposable monthly income is $0.00 or less, the “presumption of abuse” does not apply and the filer may file Chapter 7 bankruptcy. If the disposable monthly income is greater than $0.00, the “presumption of abuse” applies and absent special circumstance, the filer is advised to file Chapter 11 or 13 bankruptcy.
The Chapter 13 Means Test
In Chapter 13 bankruptcy case the Means Test is used for two purposes: First, to determine the “applicable commitment period” (i.e., how long the filer must make payments in the Chapter 13 case, generally 3 or 5 years); and Second, to determine the “disposable monthly income” for purposes of calculating the minimum monthly payment. In the Western District of North Carolina all secured debts, including mortgages, car loans, etc., are generally paid through the Chapter 13 plan.
Step 1. The first step in a Chapter 13 Means Test is the calculation of the “applicable commitment period”. This is done by comparing the filer’s gross combined household income to the applicable Median Family Income (see table above). If the filer’s income is less than the applicable Median, the applicable commitment period is 3 years; if above the Median, 5 years. A determination that the commitment period is 3 years does not necessarily mean the filer will only make payments for 3 years, but that 3 years is the minimum; each filer’s case may dictate a longer payment period. The maximum plan term is 5 years.
Step 2. Step 2 of the Chapter 13 Means Test is determining the filer’s disposable income available to make the Chapter 13 plan payment. This is done by comparing the filer’s gross combined household income to the applicable Median Family Income. If the filer’s income is less than the applicable Median, the disposable income is determined by the information provided on Schedule I (filer’s actual monthly income) and Schedule J (filer’s actual monthly expenses). If the filer’s income is more than the applicable Median, the filer’s “disposable monthly income” is calculated by taking certain deductions from the gross combined household income as described in Step 2 of the Chapter 7 Means Test, above. Some deductions are based upon federal, state, or local averages, others are based upon the filer’s actual expenses.
Given the mathematical nature of the Means Test and the methods developed by Congress in enacting the Means Test, it is often found that a filer’s “disposable monthly income” is less than $0.00, which means that the filer may file Chapter 13 bankruptcy and essentially pay the mortgage, car loans, and other secured claims and very little to unsecured creditors such as credit cards and medical bills. This common occurrence is called a “0% Plan”, meaning that the unsecured creditors get 0% of their claims. If the disposable monthly income is a number higher than $0.00 the Plan will generally pay some percentage to unsecured creditors.
