How The Means Test Works
Many clients come to the office of a bankruptcy practitioner for a free initial consult expecting to receive an answer to two important questions: “Am I a candidate for bankruptcy relief?” and, if so, “Which chapter should I file?” Our attorneys at Advanced Bankruptcy Legal Services of Connecticut can help you with every step of determining how you get an answer to these difficult questions.
Unfortunately, since the passage of the 2005 Bankruptcy Code amendments, these rather straightforward and commonsense questions may not be answerable at the initial free conference. When such is the case, the bankruptcy practitioner is now duty-bound to perform a comprehensive evaluation for the client to render an opinion and to answer the basic questions posed above. How does an attorney go about performing such an evaluation?
In essence, the attorney must analyze the client’s income and living expenses, the amount and types of creditors that are owed and the client’s sources of income. This process is best described as a comprehensive bankruptcy evaluation.
Calculation And Forms
Since 2005, the amendments to the bankruptcy laws now impose a mathematically based “means test” calculus to determine eligibility for Chapter 7 liquidation bankruptcy relief, which is for those individuals whose debts are primarily consumer debts.
Further, if one is deemed ineligible for Chapter 7 and one then opts to file for Chapter 13 relief, a similar calculus must be performed on a means test form for Chapter 13 bankruptcy to determine how much money a debtor will be expected to pay to holders of allowed unsecured claims. For purposes of Chapter 7 relief, the means test is set forth on official bankruptcy form B 22A; the Chapter 13 form is designated as B22C.
Specifics Of Calculation
Both forms require one to list all sources of current monthly Income (CMI) derived and received by the debtor in the six months ending just prior to the month in which the case is to be filed. In other words, the income is based on a look back of income actually earned or received for the six months prior to filing and ignores completely one’s current or anticipated income.
This income is then compared to the median average income for those living in the same state as the debtor and for the same family size, as these statistics are compiled and used by the United States Census Bureau. If the income from the six months prior is higher than the median family income for the debtor’s family size, then the debtor is deemed to be an “above median income debtor” (AMID) and, therefore, a presumption arises that, should this individual file for Chapter 7 relief, it will be an abuse of the bankruptcy laws.
When such a presumption of abuse arises based on the calculation of one’s CMI being above the state median income, one must then go on to complete a series of calculations on form B 22A to see if the presumption of abuse can be rebutted, thus resulting in the debtor being deemed eligible for Chapter 7 relief.
If the presumption of abuse is rebutted, then the debtor may file for Chapter 7. If the presumption is not rebutted, then the debtor must complete form B22C to determine if one is eligible for Chapter 13 relief, and, if so, how much money the debtor will be required to pay to unsecured creditors.
The money to be paid to unsecured creditors is referred to as disposable monthly income (DMI). The debtor must commit the DMI to his creditors for a 60-month period. This period of time is referred to as the applicable commitment period (ACP).
Allowable Subtractions From Income
Lastly, the debtor’s ability to rebut the initial presumption of abuse is predicated on reducing the average CMI by subtracting from the monthly income certain allowed expenses as set forth by the U.S Department of the Treasury’s IRS for living expenses of certain kinds and amounts. Here again, the allowed living expenses are not based on the actual expenses of the debtor but only on those expenses allowed if the debtor were a taxpayer who owed money to the IRS and was working out a plan with the government for the timely repayment of back taxes.
Other expenses are also allowed to be taken, but these are based on local state standards for certain expenses, which may or may not accurately reflect the debtor’s actual living expenses. Finally, the debtor may deduct some “other necessary expenses” and “additional expenses” that the debtor actually incurs in real time in order to compute one’s DMI.
This calculation also permits the debtor to subtract monthly payments for secured debts and certain types of other monthly expenses that would be considered as “priority” debts for purposes of a bankruptcy proceeding. When the calculation is completed, one has computed the monthly available income to be paid to creditors for the applicable commitment period of 60 months.
Choosing A Course Of Action
Until the means test calculus is completed for any prospective AMID client, an attorney cannot effectively and ethically recommend to the client whether a filing under Chapter 7 or Chapter 13 is appropriate. The success of the client’s case obviously depends on the attorney to analyze the debtor’s financial circumstances by engaging in the above-described evaluation of one’s eligibility for bankruptcy relief, as now required by the Bankruptcy Code amendments.
One should expect to be quoted a reasonable fee for these services. Generally, any such fee charged for the comprehensive bankruptcy evaluation will be credited to or against the fee quoted for the actual bankruptcy case. However, the fee quote for the case really can’t be meaningful until the evaluation is completed. Thus, it is both reasonable and practical for the attorney to quote a fee only once the evaluation has been performed and completely explained to the client.
Reach Out To Us With Questions
At Advanced Bankruptcy Legal Services of Connecticut, we can help you get answers to your bankruptcy questions. Call our New Britain office at 860-674-8003 or our Bloomfield office at 860-242-0574 or send us an email. We will help you determine what solution is right for your situation.