Unless debts are not primarily consumer debts (e.g., incurred in the ordinary course of business), most bankruptcy debtors are required to complete a version of what is commonly referred to as the “means test” before filing for bankruptcy relief. The income calculation for the means test is the first step of establishing the debtor’s qualification for filing a chapter 7 bankruptcy case.
The simplest way to “pass” the means test and qualify to file a chapter 7 case is for a debtor’s income to be no greater than the median family income amount established for the size of the debtor’s household in the state of residence. The following are the median family income amounts for cases filed on or after May 1, 2019, in Utah. $9,000 is added for each household member in excess of four.
This calculation is made in chapter 7 and chapter 13 cases using the following forms:
- Official Form 122A-1 (Chapter 7 Statement of Your Current Monthly Income),
- Official Form 122A-1Supp (Statement of Exemption from Presumption of Abuse Under § 707(b)(2) – Chapter 7), and
- Official Form 122A-2 (Chapter 7 Means Test Calculation) (collectively the “122A Forms”)
- Official Form 122C-1 (Statement of Your Current Monthly Income and Calculation of Commitment Period – Chapter 13)
- Official Form 122C-2 (Chapter 13 Calculation of Your Disposable Income) (collectively the “122C Forms”)
Virtually all forms of money received or paid on a debtor’s behalf is included, other than Social Security, in the means test.
- 101(10A) of Title 11 mandates that “current monthly income” for means test purposes includes “income from all sources that the debtor receives… without regard whether such income is taxable income,… and… includes any amount paid to any entity other than the debtor… on a regular basis for the household expenses or the debtor or the debtor’s dependents… but excludes benefits received under the Social Security Act.”
Based on § 101’s provisions, this calculation may include income and payments from otherwise unexpected sources of income. Here is a brief synopsis of what is, and what is not, included in the means test:
- Income from employment, including gross wages, overtime, tips, shift differentials, and commissions, (taxes and other deductions are not subtracted from these amounts);
- Income from operating a business, farm, profession. Operating expenses of a business, farm, profession, may be deducted to the extent that they are “ordinary and necessary” business expenses. If expenses exceed income, a negative “net” amount may not be used, only $0;
- Real estate income. Expenses that are “ordinary and necessary” may be deducted;
- Trust income;
- Cash gifts,
- Net gambling winnings,
- Litigation proceeds
- Interest, dividends, and royalties;
- Stock or other investments, including those in which the dividends or other proceeds are automatically reinvested;
- Pension and retirement income, 401(k)s, IRAs;
- Unemployment compensation;
- Private disability insurance benefits;
- Amounts paid by any other person or entity on a regular basis for the debtor’s household expenses; and
- Amounts paid made directly to creditors on the debtor’s behalf, such as rent, insurance, or vehicle payments.
Income tax refunds and any debt repayments to the debtor should be excluded from the means test income calculation. Social security disability benefits that are “benefits received under the Social Security Act” are not included as well.
A bankruptcy attorney is indispensable in helping debtors understand and complete the means test forms correctly. The means test is primarily used to analyze whether a debtor has any disposable income available to pay general unsecured creditors in a Chapter 13 case.
Most debtors must “put pen to paper” and make the means test calculation to determine if they have the ability to repay a portion of their unsecured debts in a Chapter 13 bankruptcy. This is typically a very complicated and lengthy task which requires the assistance of an experienced and knowledgeable Utah bankruptcy attorney.
If a person’s debts are not primarily consumer debts, then he or she is exempt from the means test. Others exempt from the means test are disabled veterans and servicemen who have incurred their debt primarily during active duty or while performing a homeland defense activity.
Correctly calculating all of a bankruptcy debtor’s relevant income and expenditures to meet the requirements of the means test may require a complex legal analysis. Theron Morrison and his team of attorneys at MLG may help anyone with this complicated but necessary evaluation. Talk to the Morrison Law Group about how you may qualify for a Chapter 7 or Chapter 13 bankruptcy case. Call 801.456.9933 today to schedule a FREE consultation. We have locations in Ogden, Logan, Sandy, and St. George to serve the residents of the counties of Weber, Cache, Salt Lake, Utah, Morgan, Davis, Washington, and surrounding areas.