Overview of Chapter 13 Means Test

Bankruptcy attorneys often handle cases where an individual’s financial situation turns upside down and they have lost the ability to meet their monthly obligations.

An individual might find themselves unemployed with no immediate income at all, and the grim prospects of a strong financial future.  They may have been involved in an accident and unable to work, or facing unexptected illness or medical expenses.

These people often have no other residual income other than a 401(k), and an old vehicle with no payment along with a high amount of debt comprised mostly of credit cards. Even so, many individuals do not like the idea filing for Chapter 7 where every asset they have is liquidated. This might be the result of wanting to pay off their debts, but just needing the time and a job to do it.

What is the Means Test?

Often times, they are left with the possibility of simply wiping away all their debt by filing Chapter 7 bankruptcy. However, many of them can file Chapter 13 after completing the means test. The “means test” is not a test per se, but more of a complex analysis of an individual’s current financial status. This evaluation looks at all received income including 401(k) withdrawals, gifts, or any other kind of income with the exception of Social Security.

The means test is calculated based on the last six months of the individual’s financial status before filing for bankruptcy. The means test also includes all of the income generated by a spouse (if any). There is a long list of specific “allowed” expenses that usually revolves around the individual’s food, shelter, clothing, and living expenses. However, the allowed numbers are often very low, and unrealistic. Other specific allowances include the amount of money generated to provide for car payments and mortgages.

The entire process does not just determine the amount of income for the household size, or the region of the country, where the individual or couple resides. It typically takes an experienced bankruptcy lawyer that is quite familiar with all of the recent decisions by the court in the area. This information will help make a proper assessment of an individual’s ability to file for bankruptcy.

Next Steps

Once the means test hurdle has been cleared, the individual or couple recognizes that passing the test was just the initial step. Any positive change in the individual’s financial life, after passing the test could immediately call for an objection through a motion to dismiss, making it impossible to file Chapters 7 or 13 simply because the individual now has too much income.

401(k) Loan Repayments

Some individuals can only qualify by passing the means test because they are using some of their monthly income to repay their own 401(k) plan. However, back in 2009, the Ninth Circuit Court of Appeals ruled that a 401(k) loan is not truly a debt, at least as defined under the strict federal bankruptcy codes. As of then, it is no longer allowed to be considered when assessing, evaluating or calculating the debtor’s ability to repay the debt based on his or her budget.

This was a result of coming to the understanding that the 401(k) debt is simply a loan being paid back to the individual filing for bankruptcy. Unfortunately, there are still major tax consequences if the loan is not repaid. However, this has nothing to do with the eligibility of filing for bankruptcy.

For anyone interested in taking the means test, it must be completed if the individual’s income is higher than the median amount for the state, as is defined by the specific household size. No matter what, the process requires a competent bankruptcy attorney to help assist in making the determination of whether or not the individual can file for bankruptcy.