The Means Test in Bankruptcy — Is There a Presumption of Abuse?

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced a means test to determine whether the bankruptcy petitioner filing for Chapter 7 is presumed abusive. If you fail the means test, you must file Chapter 13 and make payments to unsecured creditors over a 3- or 5-year period, unless you can show that special circumstances should rebut the presumption. Although Congress did not define what the special circumstances would be, it gave some illustrations, such as a serious medical condition or if you are called to active military duty. I would deem that, since the means test depends on the average monthly income and average monthly expenses and debt payments in the 6 months prior to filing for bankruptcy, a significant change in income or expenses would constitute special circumstances — thus, a serious medical condition would certainly increase expenses, and may decrease income. However, this is just a reasonable opinion, not a legal opinion. As the number of cases filed under the new law increase, there will probably be several legal opinions as to what constitutes special circumstances. In any case, the presiding judge would be the ultimate arbiter of determining whether any set of circumstances would be special in a particular case.

The means test only applies to individual debtors, not business entities, and only if the debt is mostly consumer debt, debt incurred by an individual primarily for a personal, family, or household purpose. It does not include business debt or mortgages, nor does it include debt incurred nonvoluntarily, such as those for taxes or judicial judgments. If most of the debt, either by number of loans or amount, is not consumer debt, then the means test is not applicable. However, if the number and amounts of consumer and nonconsumer loans is close, then the court will look at other factors, such as the types and amounts of the loans, and their purpose. You may also be exempt if you are on active military duty or performing a homeland defense activity for at least 90 days. If you are already released from service, then you will still qualify for the exemption if bankruptcy is filed within 540 days of the release date. If you qualify for an exemption from the means test because of these reasons, then the Statement of Exemption from Presumption of Abuse Under §707(b)(2) should be filed with Form B 22A-1, Statement of Your Current Monthly Income in the bankruptcy petition.

Means Test

For Chapter 7, there are several forms to calculate the means test. Form B 22A-1, Statement of Your Current Monthly Income is used to determine your monthly income over the past 6 months. This monthly income is then multiplied by 12 to arrive at an annual income that can be compared to the median family income. Half of the people in the state make less than the median income, and half make more. If your income is less than the state's median income, then the rest of the form does not need to be completed, since there is no presumption of abuse.

The following list shows what income must be included and what can be excluded. Note that all incomes are gross incomes, income before taxes.

The actual values for each state are provided by the Census Bureau and are adjusted for inflation. Current figures can be found here: Means Testing - Census Bureau, IRS Data and Administrative Expenses Multipliers.

If your income exceeds the state median, then whether there is a presumption of abuse is determined by filling out Form B 22A-2, Means Test Calculation. This form consists of 4 major sections to determine:

  1. average monthly adjusted income for the 6 months prior to filing;
  2. living expenses as determined by the Internal Revenue Service for a particular locality, and other necessary expenses;
  3. the total monthly payments needed for secured and priority debts;
  4. and whether there is enough income left over, if exceeding $8,175, to pay at least 25% of the debtor's unsecured, non-priority debt, or $13,650, whichever is lower. There are 2 columns for a joint filing by a married couple, if applicable.

Although the forms for the means test are somewhat lengthy, the principle is simple to understand. A Chapter 7 bankruptcy is a liquidation, completed in 4 to 6 months — the debtor is entitled to keep certain property exempt under the applicable law; anything else of value would be sold by the trustee to pay unsecured creditors. A Chapter 13 bankruptcy requires the debtor to make payments to unsecured creditors over a 3 or 5 year period.

The means test simply calculates whether the debtor, if his income exceeds the state median, will have enough income after paying necessary living expenses and priority payments, to pay at least 25% of unsecured, non-priority debt, or $13,650 (as of April 1, 2019, which increases every 3 years), whichever is less. If the debtor fails the means test, then a Chapter 7 filing would not be presumed abusive. However, the judge can, if the facts of a particular case warrant, rule that allowing the debtor to file Chapter 7 would be abusive, and could, therefore, force him to convert his case to Chapter 13 anyway. According to a recent report (see below), 94% of the people filing for bankruptcy had incomes below their state's median income, so most debtors do not have to worry about the means test.

In Part 1, Determine Your Adjusted Income, the income of the spouse that is not used to pay for the household expenses of either you or your dependents is subtracted from the household income.

Disposable Income
In bankruptcy, it is income minus allowable living expenses minus secured debt payments minus priority payments.
Priority Debt
A debt, such as for back taxes, child support, or alimony, that is usually not dischargeable.
Priority Payments
Payments, such as for taxes and child support, although not secured, must be paid.
Secured Debt
Debt for an item that a creditor has a lien or title to, or, through contract, has a right to repossess, if payment is not made.

In Part 2, Calculate Your Deductions from Your Income, all average monthly expenses are totaled and deducted from the monthly household income. This includes IRS expense allowances, additional expense deductions for those expenses that exceed IRS allowances, and the deductions for debt payment based on a projected payment plan under a Chapter 13 bankruptcy. These deductions are allowed under §707(b)(2). The 1st section calculates what the local expenses would be for a household of a particular size, as determined by the Internal Revenue Service (IRS)— not your actual expenses. (Current values: IRS Data for Allowable Living Expenses— See Section II for the IRS information.) These expenses include general living expenses, such as for food, clothing, household supplies, personal care, housing and utilities, rent or mortgage expense, and transportation expenses. Note that if you are paying a mortgage, or paying a loan for a car or leasing it, the expense that is for the actual debt is separated from the allowable expense, because the debt itself is not an actual necessary, living expense. It also includes other necessary expenses, such as taxes, mandatory payroll deductions, life insurance, court-ordered payments, education for employment or for a physically or mentally challenged child, child care, health care, and telecommunication services necessary for the debtor's health and welfare, or that of his dependents.

The next section is used to report actual expenses for:

The following section adds the required payments for secured debts and priority debts, which are debts that are not secured, but important debts that are not dischargeable, such as child support and alimony payments. This section also includes Chapter 13 administrative expenses that are calculated by multiplying the projected monthly payment by a multiplier, which can be found for each state here (Schedules of Actual Administrative Expenses of Administering a Chapter 13 Plan): Means Testing - Census Bureau, IRS Data and Administrative Expenses Multipliers. The multiplier generally ranges from 5% to 10%, although in a few districts, it is less than 5%.

In Part 3, Determine Whether There Is a Presumption of Abuse, the monthly disposable income is calculated for the next 60 months by subtracting the total monthly deductions from the adjusted current monthly income. This monthly disposable income is then multiplied by 60, to determine if there is a presumption of abuse. If the amount is less than $8,175, then there is no presumption of abuse. If the amount exceeds $13,650, then there is a presumption of abuse unless a special circumstance applies. If your income is in between, then there will be a presumption of abuse only if your disposable income is enough to pay at least 25% of your unsecured, nonpriority debt, unless special circumstances apply, which will be determined in Part 4, Give Details about Special Circumstances.

The income limits used in the means test will be adjusted for inflation every 3 years, in a cycle that started in 2007. The following income limits, referred to in the diagram below, are valid before April, 2022, when the next inflation adjustment will be made. Note that the monthly figures are calculated by dividing the income limits by 60, the number of months in 5 years.

  • Lower Disposable Income Limit = $8,175
    • Monthly Lower Disposable Income Limit = Lower Disposable Income Limit / 60 = $136.25
  • Upper Disposable Income Limit = $13,650
    • Monthly Upper Disposable Income Limit = Upper Disposable Income Limit / 60 = $227.50
Means test flowchart to determine whether a debtor can file for Chapter 7 bankruptcy, or will have to choose Chapter 13.

Finally, some statistics of debtors who filed between October 17, 2005 and September 30, 2006 from a report ( issued December 6, 2006 by CLIFFORD J. WHITE III, DIRECTOR, EXECUTIVE OFFICE FOR UNITED STATES TRUSTEES, to Congress about the new means test:

Means Testing

The following links provide the necessary data for filling out Bankruptcy Forms 22A and 22C — the means test: