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Virginia’s Means Test: Will You Pass the Test?

Do you live in the Alexandria, Virginia area, contemplating bankruptcy, and wondering if you will pass the Means Test and qualify for a chapter 7 bankruptcy? Well, before you go see a bankruptcy attorney, here are some things to keep in mind about the Means Test and specifically about the type of questions that your bankruptcy attorney will want to know, particularly if you make a pretty good living.

Despite the criticism it receives, the Means Test is really not that bad. Here is how it works. If your gross income is greater than your state’s median income when taking into consideration your household size then you must apply bankruptcy’s Means Test. Basically, the court is saying, hmm…it does not look like you automatically qualify for a chapter 7 bankruptcy, and it appears that you are making a fair amount of money. Therefore, let me scrutinize your finances a bit more before I grant you the right to qualify for a chapter 7 bankruptcy. I know, at this point, the Means Test still sounds a bit unnerving, but allow me to explain.

Let’s say you are a single individual who lives in Alexandria, Virginia (the distinction of where you live within the state can also make a bit of a difference) and grossing $70,000 per year. Because Virginia’s median income for a household of one is currently only $48,190, you will have to take the Means Test. At this point it is simply a matter of determining what your disposable income is. That is, the Means Test allows you to get “credit” for most of your monthly expenses. The court wants to know, after your monthly expenses are deducted, do you still have money left over that could be paid to creditors? If the answer is no, then you have passed the Means Test and you may be granted a chapter 7 discharge. If the answer is yes, then your option will probably be a chapter 13.

Think of Bankruptcy’s Means Test kind of like doing your taxes. You have to account for your deductions. Certain deductions are automatically given to you and those figures are pre-determined, regardless of what your actual expenses for those items are. For instance, food, clothing, household supplies, personal care, and other miscellaneous expenses are calculated based on your household size and geographic location. For those who are renting, housing expenses are already pre-determined and rather generous. Notice I said that geographic location makes a bit of a difference as well.  If you live in Alexandria, Virginia versus say, Richmond, Virginia, your housing deduction for instance will be a bit higher since it is more expensive to live in Alexandria, VA. The Meanst Test takes that into account.

Other categories of expenses are based on your actual monthly expenses. The following are some key monthly expenses that you should consider if the Means Test applies to you:

• Federal taxes, state taxes, Medicare, and Social Security taken out of your paycheck

• Car payments

• Mortgage payments

• Child support and/or alimony

• Mandatory union dues • Health insurance premiums

• Disability insurance

• Health Savings Account contributions

• Financial support to an elderly or disabled family member.

If some of these deductions apply to you, then you may be able to pass the Means Test. Back to my single individual living in Alexandria, Virginia and making $70,000 per year who let’s just say rents a home and owns one car that he is no longer making payments on. Let’s assume that this person has the following monthly expenses:

• $1500 per month in payroll deductions;

• Mandatory union dues of $200 per month;

• Paying $500 per month in alimony to his ex-wife; and finally

• $200 per month comes out of his paycheck as contributions towards his health insurance plan.

Based on these figures this individual passes the Means Test and qualifies for a chapter 7 bankruptcy. Like a good CPA who finds legally permissible tax deductions, aka “loopholes,” to reduce your taxes, the Means Test is a way to reduce your gross income to show your real financial situation. So before you throw in the towel and assume that you do not qualify for a chapter 7 because of your relatively high income, speak with a bankruptcy lawyer – you may be surprised at what you discover.

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This entry was posted on Monday, June 28th, 2010 at 5:37 pm and is filed under Bankruptcy's Means Test. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

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