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Making Sense of Bankruptcy: Using the Pickiness of the “Means Test” to Your Advantage

Because of the very particular way that the means test measures income, the timing of your bankruptcy filing may be crucial.


Here’s the sentence that we’re explaining today:

The “means test” is a rigid method for forcing certain people with the “means” to do so to pay a meaningful amount to their creditors, but because of the test’s 1) focus on income, 2) its very broad definition of income, 3) as determined from a very precise time period, filing bankruptcy just a few days earlier or later can potentially result in passing vs. failing the test.

The Intent of the Means Test

This test is supposed to separate out those have the ability to pay at least a portion of their debts, and prevent them from simply writing off their debts without paying anything.

You have to pass the means test before you are allowed to go through a Chapter 7 “straight bankruptcy.” This type of bankruptcy usually lasts about three or four months, and results in a discharge (legal write-off) of all or most debts.

If you don’t pass the means test you either end up not going through bankruptcy at all or more likely doing a Chapter 13 “adjustment of debts.” This type of bankruptcy usually requires a 3-to-5 year payment plan, through which you usually pay something to all the your creditors, although you may pay some very little or sometimes nothing at all.

There are many circumstances in which filing a Chapter 13 case is the best way to go regardless of consideration about the means test, and is thus worth the extra time and (likely) extra money. There are many tools available under Chapter 13 not available under Chapter 7. But if in your own circumstances filing a Chapter 7 case is your best option and you are instead forced to file a Chapter 13 case as a result of not passing the means test, the extra time and money would be a bitter pill to swallow.

The Focus on “Income”

The means test is based on a review of your income and expenses. But for most people only the income side of the test matters because if your income is no more than a certain amount—the published median income for your family size in your state—you pass the means test without needing to go through the expenses side of the test. So understanding how income is determined for the means test is essential for knowing how to pass the test. And the means test meaning of income is nothing like you’d expect.

A Broad Meaning of “Income”

The means test uses an expansive definition of “income.”  Almost all sources of money are counted as “income,” not just income from employment, or even all taxable income. Instead “income” includes just about all possible sources of money. So, included beyond payroll gross income are, for example, bonuses and commissions, self-employment and business income, pension and retirement income (excluding benefits under Social Security), regular payments made by any third party such as for child or spousal support, and unemployment compensation.

The Precise Time Period for Determining “Income”

Most conventional measures of income look at income earned or received during a calendar year, or a fiscal year, or the most recent 365 days. But the means test instead considers only income that you received during the last 6 FULL calendar months before the date you file bankruptcy. That amount is then multiplied by two to arrive at the annual amount.

For example, if you file a Chapter 7 bankruptcy case on June 22, the six-month period at issue is from December 1 of the previous year through May 31 of this year.

Notice that you do NOT count any income received during the days of the calendar month in which your case is filed. So in the above example do not count income received from June 1 through 22. Instead you look only at the money you received precisely from December 1 through May 31—the six full calendar months before June 22.

The Possible Effect of Filing One Day Sooner or Later

When you combine this inclusive meaning of income (so that unusual types of income matter) with this very precise time-based calculation, your income for means test purposes could shift significantly from one month to the next. Unusual chunks of income during the 6-month period are magnified because of the doubling to arrive at an annual income amount. But if that chunk of income is received during the partial calendar month in which the Chapter 7 case is filed, it’s not counted in the means test income calculation. And then as soon as 6+ months passes after that chunk of income was received, it again no longer counts.

Because income is calculated based on what was received during the 6 prior full calendar months, income for the means test gets recalculated on the first day of each calendar month. That’s because the pertinent 6-month income-counting period shifts by one month on the first of each month.

So if, for example, your regular employment income is close to your applicable median income (for your family size and state), and you received some other kind of money—a year-end bonus, an unusual chunk of child support, or money from almost any source—during the previous six months, that extra money could push you over the median income amount. That would create the risk that you would not pass the means test and instead be required to go through a Chapter 13 payment plan.

So, assuming you have some flexibility about when your bankruptcy case is filed—or have an attorney run interference for you so that you get some flexibility—you may want to delay filing until a chunk of extra money is no longer counted as income. Or you may hurry a filing if you are expecting or have just received some money that you want to avoid being counted as income for the means test.


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