When you're considering bankruptcy as a way to address overwhelming debt, you'll likely encounter something called the means test. This financial evaluation plays a significant role in determining which type of bankruptcy you qualify for and whether you can move forward with your case. Understanding what the means test examines and how to prepare for it can help you approach the bankruptcy process with greater confidence and clarity.
If you're facing financial hardship and need guidance on the means test, don't wait to get help. Contact Barbara B. Braziel Attorney At Law through our online contact form or call (833) 522-1069 today to discuss your situation.
What Is the Bankruptcy Means Test?
The bankruptcy means test is a calculation that compares your household income to the median income in Georgia for a household of your size. Congress created this test as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 to determine who qualifies for Chapter 7 bankruptcy versus Chapter 13 bankruptcy.
If your income falls below the state median, you generally pass the means test and can proceed with Chapter 7 bankruptcy. If your income exceeds the median, you'll need to complete additional calculations to see if you have enough disposable income to repay some of your debts through a Chapter 13 repayment plan.
How the Means Test Evaluates Your Income
The means test doesn't just look at your current paycheck. It examines your average monthly income over the six months before you file for bankruptcy. This six-month lookback period helps create a more accurate picture of your typical financial situation rather than basing everything on a single month.
The means test considers income from various sources:
- Wages, salary, tips, bonuses, and overtime pay
- Self-employment income and business revenue
- Rental property income
- Retirement and pension payments
- Social Security benefits (in most cases)
- Unemployment compensation
- Workers' compensation benefits
- Child support and alimony you receive
The test requires you to report all income received by you and your spouse if you're married, even if you're filing individually. However, you can exclude income from a spouse if you're separated and maintaining separate households.
Understanding the Expense Side of the Equation
After calculating your income, the means test examines your expenses. This is where many people find the process more complex. The test uses a combination of your actual expenses and standardized expense amounts set by the IRS.
The means test permits you to deduct certain expenses from your income:
- Mortgage or rent payments
- Utilities like electricity, gas, water, and phone service
- Food and household supplies
- Transportation costs including car payments and operating expenses
- Health insurance premiums and out-of-pocket medical costs
- Childcare and education expenses for your children
- Taxes and mandatory payroll deductions
- Term life insurance premiums
- Secured debt payments like car loans
Some expenses use your actual amounts, while others follow IRS national or local standards. For example, food and clothing expenses typically follow IRS standards, while your actual mortgage payment is usually deductible up to a certain limit.
Common Misconceptions About the Means Test
Many people worry unnecessarily about the means test because they misunderstand what it measures. One common misconception is that having any income at all disqualifies you from Chapter 7. In reality, many working individuals and families qualify for Chapter 7 bankruptcy because their income falls below the state median or their allowable expenses are high enough.
Another myth is that you must be completely broke to pass the means test. The test doesn't require you to have zero income or assets. It simply determines whether you have enough disposable income after accounting for necessary living expenses to repay your debts.
How to Prepare Your Financial Information
Gathering the right documents before meeting with a bankruptcy attorney can streamline the process and help ensure accuracy. Start collecting your financial records as early as possible to avoid last-minute stress.
Having these items ready will make the means test calculation more straightforward:
- Six months of pay stubs for all household wage earners
- Tax returns from the past two years
- Bank statements from all accounts for the past six months
- Mortgage statements or rent receipts
- Utility bills from recent months
- Car payment statements and vehicle insurance bills
- Medical bills and health insurance documentation
- Credit card statements showing current balances
- Documentation of child support or alimony payments
- Any other proof of income or expenses
Organize these documents chronologically and make copies for your attorney. The more complete your documentation, the more accurately your attorney can calculate your means test results and advise you on your options.
Special Considerations That Affect the Test
Certain situations can impact how the means test applies to you. If you're a veteran with service-connected debt, you might be exempt from the means test entirely. If you experienced a recent income drop due to job loss or medical issues, your six-month average might not reflect your current financial reality, though the test still uses that historical period.
Seasonal workers and self-employed individuals often have income that fluctuates significantly. The six-month average attempts to account for these variations, but it may not capture temporary changes in your financial situation.
What Happens If You Don't Pass the Means Test
Failing the means test doesn't mean bankruptcy isn't an option for you. It typically means you don't qualify for Chapter 7, but you may still be eligible for Chapter 13 bankruptcy. Chapter 13 allows you to reorganize your debts through a three-to-five-year repayment plan based on your disposable income.
Some people actually benefit from Chapter 13 because it allows them to catch up on mortgage arrears, keep property they might lose in Chapter 7, or address certain debts that aren't dischargeable in Chapter 7. An experienced bankruptcy attorney can explain which option better serves your specific circumstances.
Why Professional Guidance Matters
The means test involves numerous calculations, exceptions, and nuances that aren't immediately obvious. Small mistakes in reporting income or claiming expenses can affect whether you pass the test and which bankruptcy chapter you qualify for. Working with an attorney who understands bankruptcy law ensures that you complete the means test accurately and make informed decisions about your financial future.
An attorney can also identify legitimate deductions you might overlook and help you understand how timing your bankruptcy filing might affect your means test results. They can review your complete financial picture and recommend the most appropriate path forward based on your goals.
Get Help With Your Bankruptcy Means Test Today
If you're struggling with debt and wondering whether bankruptcy might provide relief, understanding the means test is an important first step. The team at Barbara B. Braziel Attorney At Law has helped many individuals and families in Savannah, Chatham County, Bryan County, Effingham County, and surrounding areas navigate the bankruptcy process successfully. We can review your financial situation, help you gather the necessary documentation, and explain how the means test applies to your case.
Contact us through our online contact form or call (833) 522-1069 to schedule a consultation and take the first step toward financial relief.