What Is The Means Test In Relation To Bankruptcy?
In 2005, Congress amended the bankruptcy law, primarily because they did not want rich people to file chapter 7; they wanted them to go into a chapter 13 and set up a payment plan for their creditors. So they developed the means test as a way to make sure that people don’t file chapter 7 when they should be filing chapter 13. So the means test qualifies you for chapter 7. If the combination of if everyone in your household makes less than the median income for the state in which you live, depending on your household size, then you pass the means test. Those figures change every November 1st and April 1st. If your household makes more than the median income, then there is a second level in the means test, and you may still pass, but if you don’t then you have to file chapter 13.
In terms of a chapter 13 bankruptcy, the payment you make to your creditors over the customary five-year period may also be determined by the means test. We just did a bankruptcy for someone who is required to pay $374 for 60 months towards their debt, which amounts to $20,000. Their debt was $115,000, so they are going to be paying back 20% of their debt over a five-year period.
How Do Children Figure In The Means Test?
We count dependent children. Sometimes we have a husband and wife come in and say, “Well, we had a child between us, but his children from a previous marriage visit us on weekends.” My next question is, “Is that child a dependent on your tax return?” He may say, “Every other year – sometimes, if I need to, I count the child, and sometimes I don’t.” The trustees often go by a term known as “heads to beds”. In other words, how many people are living in the house at least 51% of the time? You can count your college kids as long as they are still dependent and you are providing their support because, when they come home, they’re home. It’s not like they have flown from the coop for good, or are self-supporting.
What Are The Allowable Expenses In The Means Test?
The means test has standard expenses for housing and utilities, and for vehicle operation expenses, which is a standard amount, as well as vehicle ownership or lease expenses, which is another standard amount from which you deduct your car payment. There is also public transportation expenses, another standard amount. Your federal, state and local taxes, such as income tax, self-employment tax, Social Security and Medicare, are deductible on the means test. Involuntary deductions would be the monthly payroll deductions that your job requires, such as retirement contributions, union dues and uniform costs.
You can also deduct actual premiums that you pay for your term life insurance. Court-ordered payments can actually help you on the means test, which are usually child support and spousal support. Daycare and childcare costs are one of the best deductions. Another big expense that helps you on the means test is a big mortgage. The higher your mortgage is, the more it helps you on your means test. Education costs that are required for your job or for a physically or mentally challenged dependent child can be another deduction.
Additional healthcare expenses are a deduction; this can include health insurance, disability insurance and contributions to a Health Savings Account. Expenses for the care of household or family members is another deduction, even if that household or family member doesn’t live with you, such as if they live in another state or country.
There are some deductions that aren’t as helpful when it comes to the means test, such as home alarm systems. Additional home energy costs and food and clothing expenses require proof to the trustee of the actual monthly expense. Education expenses for dependent children who are younger than 18, such as school supplies, may be deductible up to around $149 per child but be prepared to provide proof to the trustee. Continuing charitable contributions up to 15% of your gross income are OK, but normally will require further proof to the trustee.
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