Determining your correct “applicable state” can make the difference between passing and failing the means test.
Median Income Varies Significantly by State
This series on the Chapter 7-qualifying means test has focused on the test’s most important element: income. There are several ways of passing the means test. But they are all based completely or in part on your income (as that’s specially defined in the means test).
The easiest way to pass the means test for your income to be no larger than the median income applicable to you. The median income applicable to you is the one for your household size IN YOUR STATE.
The crucial median income amounts are quite different in different states. For example, if you have a household of four, the current median annual income amounts range from a low of $60,256 in New Mexico to a high of $114,886 in New Jersey, nearly twice as much. (These amounts are accurate as of this writing—see this median income table—and are adjusted every several months)
So what if you’re not sure what state you should pick on this table of median family income amounts? What if you’ve moved recently or expect to move not long after filing bankruptcy? What if you have a business operated out of one state but mostly live in a home in another state? Or what if you’re married but maintain households in two states?
There’s No Clear Answer
If you’ve lived and worked in the same state for years, it’s obvious which state to use for median income. But if you’ve moved recently, expect to soon, or have personal or business connections in more than one state, which state to use is not at all obvious.
And the language of the Bankruptcy Code does not help. When Congress created the “means test” its language simply says that you compare your “income” to the “median family income of the applicable State.” The Code language (11 U.S.C Section 707(b)) says nothing about how to figure out your “applicable State.”
The “State in Which You Live”
There’s a bit more of a clue in the bankruptcy form used to determine your “income” for “means test” purposes. It’s called the “Chapter 7 Statement of Your Current Monthly Income,” Form 122A-1. It has you compare your “income” to the appropriate median family income amount. This form asks you (at question 13) to “[f]ill in the state in which you live.”
That’s not very helpful if you live in more than one state, or are in transition between them.
Some more guidance comes from the U.S. Trustee’s Office. That’s part of the U.S. Department of Justice, and is the major enforcer of the “means test.” It has put out a “Statement of [It’s] Position on Legal Issues Arising under the Chapter 7 Means Test.” On the issues we’re dealing with here, this Statement says simply that your “[a]pplicable state is [the] state of residence at filing.”
That seems to mean that you fixate on where you are residing on the date of filing, disregarding states you’ve recently moved from or expect to be moving to.
This Statement also addresses the situation if your family is living in two different states simultaneously. Your “residence is where most family members reside.” And if there’s the same number in both locations, “use state of spouse with highest income.”
The Bottom Line
So other than the marginally helpful information just described, the law for determining your “applicable state” is vague. Furthermore, the U.S. Trustee’s Office’s Statement does not have the force of law, even if it’s a respected source.
These kinds of vague matters in the law are often left to local practices. These may be formal—local or regional federal court rulings. Or they may be informal—just the way a particular regional U.S. Trustee’s Office or local bankruptcy judge or judges tend to interpret the “applicable state.”
This is a good example why you need the advice of an experienced bankruptcy lawyer. He or she spends years, all day every day, immersed in bankruptcy statutes and rules. Even more importantly here, the lawyer constantly deals with and gets very familiar with the policies and practices of local judges and other players in the system.
Choosing the right “applicable state” can make the difference between qualifying for the 3-4-month-long Chapter 7 case instead of being stuck in a 3-to-5-year Chapter 13 one. So the experience and advice of a lawyer could be invaluable here.