7 Common Pitfalls in Meeting the Chapter 7 Means Test

When individuals struggling with overwhelming debt decide to file for Chapter 7 bankruptcy, they must usually pass the means test. This is the government’s method of determining whether the debtor actually has sufficient income to repay creditors, at least partially. The means test can be a formidable hurdle to establishing eligibility for bankruptcy relief.

The means test compares your income against your state’s median income for households of similar size to yours. If your income is below that median, you pass the test. If it is higher, you still might pass the test if you can show expenses that significantly reduce your disposable income. The calculation can be complicated and requires close attention to details.

These are common mistakes that Chapter 7 filers make while trying to pass the means test:

1. Miscalculating household size — The median income threshold you need to meet is determined in part by your household size. Failing to include eligible dependents or mistakenly counting individuals who should not be included can throw off the calculations.
2. Reporting income incorrectly — The means test requires debtors to report their average monthly income over the past six months. Errors are often made by debtors with irregular income sources, such as seasonal workers and contractors.
3. Including Social Security benefits as income — The Bankruptcy Code exempts benefits under the Social Security Act, including Social Security retirement benefits, Social Security Disability Insurance and Supplemental Security Income.
4. Failing to use the business debt exception — A debtor is exempt from the means test if his or her business-related debts exceed the amount of consumer debts. Business-related debts are those incurred with an eye towards making a profit, as opposed to debts incurred primarily for a personal, family or household purposes.
5. Not using the marital adjustment— In some cases, married individuals or those in domestic partnerships may have the option to use a marital adjustment, which can reduce the household income.
6. Not listing substantial expenses — If your monthly income is more than your state’s median income for a household of the same size, you may still pass the means test by deducting certain expenses. These include mortgage payments, car payments, tax liabilities, insurance premiums, childcare, health care, educational expenses and care of an elderly or disabled person, among other continuing obligations.
7. Failing to seek legal guidance — An experienced Chapter 7 bankruptcy attorney can help you accurately calculate your income and expenses and allowable exclusions and deductions, all with a view to surmounting the means test.

Jeff Field & Associates in Newnan provides reliable advice and effective representation in bankruptcy matters for debtors throughout the Atlanta metropolitan area. We have offices in Scottdale, Gainesville, Marietta, Lawrenceville, Douglasville and Athens. To schedule free initial consultation, call 404-381-1278 or contact us online.