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The Means Test is an income test that may serve as a gateway to bankruptcy. Our experience has been that few clients are prevented from filing Chapter 7 due to the Means Test. Even so, sometimes issues arise. Below, we briefly cover when the Means Test applies and issues that may come up.
This chart outlines the median income by household size in North Carolina as of May 1, 2014.
|# of Earners||1||2||3||4||5||6|
The determination of the CMI is not calculated from your current income, but rather is based on your average income received during the six-month period ending on the last day of the month prior to filing the bankruptcy. Furthermore, certain income, such as social security benefits, are not included in the calculation of median income. The rules on calculating CMI are complicated and are not covered in this basic overview. You must be able to provide us with accurate information and documentation concerning your income for the prior six months, as well as a prediction of future income.
Even if your CMI exceeds the median income, you can pass the Means Test by establishing that your expenses leave you with insufficient funds upon which to pay a significant amount on your debts. The rules on determining these expenses are quite complicated and are not covered in this basic overview.
If you do not "pass" the means test after deducting the standard expenses from your income, a "special cirucmstances" exception may apply.
Special circumstances are those circumstances which justify additional expenses not included in the approved expenses set out on the Bankruptcy Code or which justify adjustments to the calculation of current monthly income. There must be no reasonable alternative to the additions or adjustments. Examples of special circumstances are a serious medical condition or a call to active duty in the Armed Forces. In order to establish special circumstances, you must itemize each additional expense or adjustment to income and provide both documentation for such expense or adjustment and a detailed explanation of the special circumstances that make such expense or adjustment to income necessary and reasonable. You must attest under oath to the accuracy of any information provided to demonstrate special circumstances.
John Smith is a single man who lives alone. He is unemployed from May 25, 2013, to July 30, 2013, and receives no benefits. He obtains a job on August 1, 2013, at an annual salary of $54,000.00. He files a Chapter 7 bankruptcy on December 15, 2013. His gross income from August 1 to November 30 is $18,000.00. To calculate John Smith's income under the bankruptcy law, we need to take the following steps.
Note how this example will differ if John Smith waits until January 2, 2014 to file bankruptcy.
Waiting until January, means that the 6 month period we use to calculate John's CMI will be July - December. John was receiving $4,500.00 per month for 5 of those months and $0.00 for 1 month. The total for that 6 month period is $4,500.00 x 5 = $22,500.00. We then multiply $22,500.00 x 2 to annualize John's income. The annual amount is now $45,000.00. Now, John's income is above the median, so to determine if John "passes" the Means Test we must analyze his expenses under the rules set out in the Bankruptcy Code.
Joe and Jane Doe have 2 children. Jane works for the State and earns a flat salary of $36,000.00 ($3,000.00 per month). Joe was working for a telecom company and was earning $78,000.00 per year. On April 30, 2013, he is in a serious automobile accident and is permanently disabled. He receives gross private disability income of $3,500.00 per month for 6 months (May – October). Effective December 1, 2013, he will start receiving social security disability benefits of $2,200.00 per month and his private disability will stop. If they file bankruptcy on November 15, 2013, their income from May 1 to October 31 is $39,000 (see calculation below). On an annual basis, the debtors' income is $78,000, which exceeds the median income $67,116.00 for a household of 4. However, if they wait until February 1, 2014, to file, their income for the six months period of August 1 to January 31 will be below the median. The calculations are set forth below.
|May 1 - Oct. 31||Aug. 1 - Jan. 31|
|Wife's Income||$18,000 ($3,000 x 6)||$18,000 ($3,000 x 6)|
|Husband's Income||$21,000 ($3,500 x 6)||$10,500 ($3,500 x 3)|
|Total 6 month Income||$39,000||$28,500|
Remember social security is not included in CMI. The annual income is $57,000, and is below the median income.
From these two examples, the following lessons are learned: