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How Does the Means Test Work?
If you are filing bankruptcy in the Oakland area, and your current monthly income is above the median income for California, you will have to take what is known as the “means test.” The means test was set up by Congress to determine if a “presumption of abuse,” arises in your case. A presumption of abuse means that based on the results of the means test, there is a presumption that you can pay back at least part of your debt and that if you were allowed to discharge all of your debt in a bankruptcy that would be an abuse of the bankruptcy code.
If your income is higher than the states median income and you pass the means test you can still file a chapter 7 bankruptcy. This means that although originally, your income is high enough to require the analysis of the means test, after inputting your real income and expenses, your disposable income is low enough to pass the means test, you are eligible for chapter 7 relief.
If you do not pass the means test, you may have to file a chapter 13 bankruptcy where you pay back some, but not all, of your debt to your creditors. If people have a choice they usually chose a chapter 7 over a 13 because it is a total liquidation of your unsecured debts.
Information you will Need to Take the Means Test
The first step in taking the means test is to calculate your current monthly income. This requires analysis of the last 6 months of income for you and your spouse, if married. You will then have to enter your expenses. The IRS gives you a set of predetermined expenses to use, if you don’t have a mortgage or car payment. These vary depending on the area in which you live. You will be able to include some of your actual expenses. Some of the expenses you will want to include are:
- Any charitable contributions you regularly make.
- Food and clothing expenses that exceed the predetermined expense (no more than 5% more.)
- Education expenses for children (up to a certain amount.)
- Home energy costs over the IRS allowed expense.
- Home security systems.
- Any expenses to care for a family member who is disabled or elderly.
- Certain telecommunication expenses, if necessary for the health and welfare of you or your dependents.
- Childcare expenses, including preschool.
- Education expenses that is necessary for employment.
- Child support or Alimony payments (excluding arrearages.)
- Term life insurance costs, not including whole life insurance or life insurance costs for your dependents.
- Payroll deductions required by your employer such as: 401k contributions, union dues, uniform costs.
- Federal, state, local taxes. (Not including property or sales taxes).
- Monthly payments to secured debts such as a car or mortgage payment (total payments due in the next five years divided by 60 if your payment is due to end within five years after your filing date).
- One-sixtieth of arrearages you owe on a secured debt such as a car or mortgage.
- One-sixtieth of a priority debt such as a recent taxes (that became due within the three years prior to you bankruptcy).
- The amount of the trustee fee if you were to file a chapter 13 bankruptcy.
When you Finish Calculating your Expenses
Once you have calculated all of your expenses, the means test determines if you have any money left over after your expenses are paid. If you do, this income is called “disposable income.” If your disposable income in nominal, $125.40 or less, you have passed the means test and are eligible for chapter 7 relief. If your disposable income is larger, you are not eligible for chapter 7 but you may be eligible for chapter 13.
Taking the means test can get complicated and it is always a good idea to seek the advice of an experienced bankruptcy lawyer.
The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy under the bankruptcy code.
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