Bankruptcy Means Test

Bankruptcy Means Test Information From Our Sacramento Lawyer

In 2005, Congress made sweeping changes to the United States Bankruptcy Code, the most significant of which was the requirement that debtors whose debts are primarily consumer debts demonstrate an inability to repay unsecured creditors at least in part. Form B22, often referred to as the “means test,” must be filed along with the bankruptcy petition, schedules, statement of financial affairs, and various other forms.

The Bankruptcy Means Test

The Means Test is performed by reducing the debtor’s current monthly income by his or her expenses, then multiplying the difference by 60. The result will determine whether the debtor can file Chapter 7, or whether a Chapter 13 will be necessary.

The debtor’s allowable monthly expenses are governed by the IRS and fall into different categories depending on the type of expense:

IRS National Expense Categories. Expense amounts for the categories below will be taken from National Expense Categories a single table maintained by IRS for all states. [§707(b)(2)(A)(ii) (I) & (II)]

  • Apparel and services. Includes shoes and clothing, laundry and dry cleaning, and shoe repair.
  • Food. Includes all meals, home or away.
  • Housekeeping supplies. Includes laundry and cleaning supplies; postage and stationary; other household products: cleansing and toilet tissue, paper towels and napkins, lawn and garden supplies, and miscellaneous household supplies.
  • Miscellaneous. A discretionary allowance.

Food & clothing expenses may be increased by 5% above the allowance when “reasonable & necessary.”

IRS Local Standard Expenses. Expense amounts for the categories below will be taken from the IRS Local Standard Expenses table, based upon the county in which the debtor resides. [§707(b)(2)(A)(ii) (I) & (II)]

  • Utilities. Includes gas, electricity, water, fuel oil, coal, bottled gas, trash and garbage collection, wood and other fuels, septic cleaning, and telephone.
  • Housing. Usually, only expenses for the place of residence are considered to be necessary. Housing expenses include: mortgage or rent, property taxes, interest, parking, necessary maintenance and repair, homeowner’s or renter’s insurance, homeowner dues and condominium fees.
  • Transportation. Vehicle insurance, vehicle payment (lease or purchase), maintenance, fuel, state and local registration, required vehicle inspection, parking fees, tolls, driver’s license, public transportation. Transportation costs not required to produce income or ensure health and welfare are not necessary.

Assuming the debtor passes the Means Test, and his/her income and expense analysis is ok, we then proceed with filing the case.

At the Law Offices Of Russ Wyatt, a bankruptcy lawyer will explain how the Form B22 means test works and determine whether it is likely to constitute an issue in your would-be bankruptcy. We will thoroughly review your financial situation and help you maneuver through the system so you can get the debt relief you need.

Timing Is Critical

Since the Form B22 means test looks back at the debtor’s household’s income over the preceding six month period, the timing of the filing can often be critical. For example, if the debtor receives a sizeable bonus in December that inflates income to the point the debtor’s Form B22 means test reflects surplus income, the debtor may be wise to wait until July to file bankruptcy, at which time the December bonus drops out of the six-month look back.

Say you own a house, have decided to walk away from it and let the mortgage company foreclose, but still have sufficient other debt that you wish to discharge in bankruptcy. Do you file bankruptcy before the foreclosure or after the foreclosure?

Mortgage payments are a legitimate “means test deductible” expense, whether payments are being made or not. One’s rent expense is based on an Internal Revenue Service-approved chart of household expenses. If your income is higher than the median level of income for a household of identical size, the mortgage expense may be a critical component to passing the Form B22 means test.

Timing is therefore often of critical importance. Schedule as early in the process as possible a no-charge in-person or by-phone initial consultation to discuss your bankruptcy options in general and how you can successfully pass the Form B22 means test in particular.

For more information on filing Bankruptcy in Sacramento, please contact the Law Office of Russ Wyatt today.