The Point of the Means Test
This test is intended to determine if you have the “means” to pay a meaningful amount to your creditors over a reasonable time period. You have to pass the means test before you are allowed to go through a Chapter 7 “straight bankruptcy,”
which generally lasts less than four months, or instead are forced to do a Chapter 13 “adjustment of debts,” which generally lasts three to five years.
Focus First on “Income”
At the heart of the means test is a review of your income and expenses. But for most people, only the income side of this matters. That’s because if your income is less than a certain amount—the published median income for your family size in your state—you pass the means test without needing to go through the expenses side of the test. This means that it’s absolutely crucial to understand how income is calculated for the means test, because it’s nothing like you’d expect.
The Unusual Timing of Means Test “Income”
“Income” for purposes of the means test is not determined by what you received during the last calendar year, or the most recent tax year, or at the last 365 days before filing bankruptcy. Instead the test considers all income that you received precisely during the last six full calendar months before the date you file bankruptcy, then multiplying that amount by two.
It’s important to note is that you do NOT count any income received during the days of the calendar month in which your case is filed. For example, if you file bankruptcy on October 26, you don’t count income received from October 1 through 26. Instead you look only at the money you received precisely from April 1 through September 30—the six full calendar months before October 26.
Count Virtually All Incoming Money as “Income”
This 6-month income timing rule is combined with a very broad definition of “income.” Almost all sources of money are counted as “income” for the means test. These include, for example, bonuses and commissions, self-employment and business income, pension and retirement income (excluding benefits under Social Security), regular payments made by any third party such as child or spousal support, and unemployment compensation.
The Difference that Filing One Day Sooner or Later Can Make
The effect of this unusual calculation of “income” is that waiting to file your Chapter 7 case just a few days—or even just a single day—could potentially mean not being allowed to finish that case under Chapter 7 but rather being bumped into a Chapter 13 case. Instead of likely not having to pay anything to your creditors under Chapter 7 you would instead have to pay all you could afford to your creditors during a three-to-five-year Chapter 13 payment plan.
Why would that be? If your regular employment income is close to your applicable median income, and you received a payment of some other kind of money during the applicable prior six months—a year-end bonus, an unusual amount of child support, or money from almost any source—that extra money could push you over the median income amount. As a result the risk that you would not pass the means test would greatly increase. You would likely instead be required to go through a Chapter 13 payment plan.
Using the October 26 Chapter 7 filing example above, if you received a bonus or some other chunk of money on October 1, that money would not count as long as your bankruptcy was filed during that calendar month, by no later than October 31. The only income that would count would be from the prior six calendar months, April 1 through September 30. However, if the bankruptcy were not filed until a few days later, on November 1, the income that would then count for the means test would be income received from May 1 through October 30. So that would now include that extra amount received on October 1, potentially pushing the income about the published median amount and thus not passing the means test.
The means test is indeed a complicated legal concept. And we have only touched here on the easiest part—the “income” portion. In New Jersey the Law Office of Andrew B. Finberg can help you understand and qualify under the means test. Our initial consultation is free. So please call us at (856) 208-4152 or use this form to set that up with us. We can review your situation personally so that you get the reassurance you need. We look forward to the privilege of serving you.