Means Test Deductions

If you are "over-median", then hope for qualifying for chapter 7 bankruptcy relief is not lost (far from it!), but you must complete and pass the dreaded "means test" calculation (form 122A-2).

The starting point is your current monthly income ("CMI")(statement of current monthly income, form 122A-1). Your CMI is your "gross". From that, the means test calculates your disposable monthly income, or "DMI", a supposedly objective calculation of how much money you should have available to pay your creditors at the end of the month, after all of your necessary expenses are paid.

To calculate your DMI, four categories of expenses are deducted from your CMI: 1-) national standards, 2-) local standards, 3-) other necessary expenses, and 4-) additional expenses. As your bankruptcy lawyer I would seek to enhance your opportunity for eligibility by using the full amount of the deductions to which you are entitled.

Some of these deductions are based on IRS "standards", not your actual expenses.

The National Standards determine your deductions for food, clothing "and other items", and for out-of-pocket health care expenses (e.g., medical and dental expenses not reimbursed by insurance). Each deduction is multiplied by the number of people you could claim as exemptions on your federal income tax return, plus the number of any additional dependents you support. If you are a divorced or separated parent who supports a child you cannot claim as an exemption, you may nonetheless be entitled to claim that child for purposes of the means test. You are entitled to a higher out-of-pocket health care allowance for each person age 65 or older. Some of the standards are minimums: if your actual out-of-pocket health care expenses exceed the standard, you will be able to deduct the additional amount.

The Local Standards determine your minimum deductions for housing and utilities costs (including insurance and mortgage or rent) and transportation expenses. There are two types of transportation expenses, which vary with the number of vehicles you own or operate. You may claim an "operation expense" for each vehicle you own, even if there is no car loan or lease payment associated with the vehicle. You may claim an "ownership or lease expense" for each vehicle for which you make loan or lease payments. The deductible payments must reflect a projected 60 month average, beginning on the date you file your bankruptcy petition.

Other deductions are based on your actual monthly expenses. These are categorized as Other Necessary Expenses (including taxes, involuntary payroll deductions, your own term life insurance premiums, court-ordered support payments, and childcare expenses), Additional Expense Deductions (including health and disability insurance, HSA expenses, educational expenses for children under 18 (subject to a cap), and continuing contributions to a religious or charitable organization) and Deductions For Debt Payments which are secured by property you own.

Some unionized employees, typically teachers and other government workers, are mandated to make 401K or retirement plan contributions, so those become deductible under the means test. For purposes of qualifying for chapter 7, large mortgage or car loan payments can actually be an advantage, since they result in a larger deduction, even if you intend to abandon the collateral.

As you can see from this overview, determining chapter 7 eligibility is not intuitive, so even if you are in doubt as to whether you can qualify it is highly recommended that you consult with an experienced bankruptcy lawyer so that you are apprised of all of your options.