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A Simple Example of Passing the Means Test

July 5th, 2017 at 7:00 am

 We show by example how the means test works, when a person qualifies for a Chapter 7 case simply by income.  


An Example is Worth a Thousand Words

You have to pass the means test to qualify for a Chapter 7 “straight bankruptcy. In a recent blog post we said that the easiest way to pass the means test is by your income. If your income is low enough you pass without having to look at your allowed expenses or special circumstances.  Let’s see how this works by way of an example.

Our Example—The Facts

Jeremy and Allison need bankruptcy relief. Their bankruptcy lawyer has recommended that they file a Chapter 7 case based on their circumstances. They have decided to do so.

They are both employed and get paychecks twice a month, on the 1st and 15th of the month. Jeremy has a gross income of $2,750 per month and Allison $3,250 per month.

They have two children who live with them in their home in Indiana.

“Income” for the Means Test

For purposes of the means test you count virtually all sources of incoming money (other than from Social Security). But you count only money received during the 6 FULL CALENDAR months before filing the Chapter 7 case.

Allison and Jeremy want to file their case during July. So they look at the income they’d received during the period from January 1 through June 30, the 6 full calendar months before. That’s 6 times $3,250 for Allison, or $19,500, plus 6 times $2,750 for Jeremy, or $16,500, or a combined $36,000. Multiply that by 2 to get an annual income of $72,000.

The Median Income for Your Family Size in Your State

Allison and Jeremy would pass the means test the most easily if their income, as just calculated, would be no larger than the median income amount for their family size in their state.

The median income amount for a group of people is similar to their average income amount, but not quite. It’s the amount at which half of the people have a greater income and half have less.

So for Jeremy and Allison, the median income is the amount at which half of the families of four people in Indiana have more income and half have less. How do they find out that amount?

It’s provided online by the U.S. Trustee. Here is a table showing the most current information of this writing. (This table is updated every few months so check here for more current median income tables.)

Notice that the median income for Jeremy and Allison’s family size and state is $77,566. Their income as calculated above, at $72,000, is less than this median income amount.

Conclusion

As a result Allison and Jeremy pass the means test simply on the basis of their income. They and their lawyer don’t need to go through the process of figuring out and deducting all their allowed expenses to find out if they pass the means test. Their income is low enough. It’s presumed that they don’t have enough money left over to pay a meaningful amount back to their creditors.

 

Household Size Really Matters for Passing the Means Test

June 30th, 2017 at 7:00 am

You can have more income for the purpose of passing the means test as your household size increases. But what IS your household’s size? 


Household Size in the Means Test

When introducing the means test a week ago we showed how passing that test often depends on your income. You start by comparing your income to the median income amount for your family size in your state.  As your family size increases you can have more income and still pass the means test.

For many people the size of their household is obvious. But not for everybody. Today’s blog post gets into how to figure out the size of your household when it isn’t obvious.

Where to Find the Definition of Household

The federal Bankruptcy Code does not provide a definition of household or how to determine its size.

The U.S. Trustee points us in the right direction. (That’s part of the U.S. Department of Justice which Congress tasked with enforcing the means test.) The U.S. Trustee has put out a “Statement of the U.S. Trustee’s Position on Legal Issues Arising under the Chapter 7 Means Test.” This Statement states:

  • “Household size” is the debtor, debtor’s spouse, and any dependents that the debtor could claim under IRS dependency tests. The USTP uses the same IRS test for the definition of both “household” and “family.”

It then refers to the Internal Revenue Service’s Publication 501 for the definition of dependent.

The IRS Definition

The IRS defines “dependent” (on page 11 of that Publication 501) as either a “qualifying child” or a “qualifying relative.” The IRS then spends 11 pages of fine print to explain its rules for those two terms. Here’s an overview of those rules. They are somewhat detailed but should help you determine your household size.

To be a “qualifying child”:

1. The child must be your son, daughter, stepchild, foster child, brother, sister, half-brother, half-sister, stepbrother, stepsister, or a descendant of any of them.

2. The child must be

(a) under age 19 at the end of the year and younger than you (or your spouse if filing jointly),

(b) under age 24 at the end of the year, a student, and younger than you (or your spouse if filing jointly), or

(c) any age if permanently and totally disabled.

3. The child must have lived with you for more than half of the year.

4. The child must not have provided more than half of his or her own support for the year.

5. The child must not be filing a joint return for the year (unless that joint return is filed only to claim a refund of withheld income tax or estimated tax paid). If the child meets the rules to be a qualifying child of more than one person, only one person can actually treat the child as a qualifying child.

To be a “qualifying relative”:

1. The person can’t be your qualifying child or the qualifying child of any other taxpayer.

2. The person either

(a) must be related to you in one of the ways listed under Relatives who don’t have to live with you, or

(b) must live with you all year as a member of your household2 (and your relationship must not violate local law).

3. The person’s gross income for the year must be less than $4,000.

4. You must provide more than half of the person’s total support for the year.

After All These Rules, One Important Twist

The U.S. Trustee’s Program’s Statement adds this potentially very important meaning of household:

The USTP departs from the IRS dependent test…  in cases justifying “reasonable exceptions” (e.g. a long standing economic unit of unmarried individuals and their children).

Considering how many millions of non-traditional households there are in the U.S., this “long standing economic unit” exception may be helpful for you in determining your household size and passing the means test. Talk with your local experienced bankruptcy lawyer about it.

 

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