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Will I pass the Means Test? Will I be able to file chapter 7 bankruptcy

June 28th, 2010 by Robert Brandt   |   1 Comment   |  Filed under Bankruptcy's Means Test

This is a follow up to my last article titled Will I qualify for chapter 7 bankruptcy in Virginia? As stated in that article, if your median income based on your household size exceeds the amount that automatically qualifies you for a chapter 7 bankruptcy, then you will have to “pass” the Means Test. Basically, Congress is saying hmm…it looks like you are making a fair deal of money so let me scrutinize your finances a bit more before I make the determination that you do indeed  are deserving of a chapter 7 bankruptcy discharge.

As this blog will hopefully demonstrate, despite the name, the Means Test is really not all that mean of a test (pardon the pun…just could not resist). In fact, you might be surprised to learn that some people with relatively high income can still “pass” the means test and qualify for chapter 7 bankruptcy. In other words, do not diagnose yourself and do not assume that just because your income exceeds Virginia’s median figures that you will not be able to beat the means test.

For instance, you are a single individual living in Virginia and grossing $75,000 per year.  Virginia’s median income for a household of 1 at this time is only $52,247.00.  You will have to take the Means Test.  So at this point Congress says ok, take the Means Test and show me if you do indeed have any “disposable monthly income” left at the end of the month.  In other words, after giving you credit for a whole host of deductions each month, Congress wants to know, do you still have some money left over that you could apply to your 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 only remaining option will probably be a chapter 13.

Think of the bankruptcy Means Test kind of like doing your taxes. You have to account for all your deductions.  Meaning, the gross amount that you make per year is only the beginning of the discussion.  It’s not the number that you will be taxed on when doing your taxes and for bankruptcy purposes, it is not the number that will ultimately determine if you can file a chapter 7 case.

When doing the Means Test certain deductions are automatically given to you and those figures are pre-determined by Congress, 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 the county you live in.   Same thing goes for your housing utilities and your mortgage/rental expense, already pre-determined by Congress. Ditto for your car operating expenses.

The rest of the deductions on the Means Test will require you to make a determination of how much you are spending on a monthly basis for those particular expenses. They will require “real numbers” instead of numbers assumed by Congress to be applicable to you and your housing size. The following are some key monthly expenses/deductions that you should utilize, assuming of course that you actually have these deductions:

  • Your payroll taxes. You can deduct your federal taxes, state taxes, Medicare,      and Social Security that is being taken out of pay check.
  • Your car payments if they are particularly high.
  • Your mortgage payments if they are especially high.
  • Your child support and/or alimony.
  • Your union member dues.
  • Your health insurance premium or other type of insurance expense.
  • Your HAS/FSA contribution.
  • Your child care expenses like day care, nursery, and preschool.
  • Your contributions to the church or other charitable contributions.

With all these deductions at your disposal you may very well be able to “pass” the Means Test.  Back to my single individual making $75,000 per year who let’s just say does not own a home, but does have car payments.  Let’s assume that this person has the following monthly expenses:

  • $1500      per moth in payroll deductions;
  • Mandatory      union dues of $100 per month;
  • Paying      $500 per month in child support 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.

The point is this: A good CPA can find you certain “loopholes” (I am talking about legally permissible tax deductions) and have you paying a whole lot less in taxes than you might have anticipated. Similarly, a good bankruptcy attorney, can very well use various deductions to ensure that you “pass” the means test. So, before you are ready to throw in the towel and assume that you do not qualify for a chapter 7 because of your relatively high income, go and speak with a bankruptcy attorney.  You may be surprised at what you discover.

 




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Robert S. Brandt

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Alexandria, Virginia 22314
Phone: 703-342-7330
Fax: 703-229-4132

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    The Law Firm of
    Robert S. Brandt

    1513 King Street
    Alexandria, Virginia 22314
    Phone: 703-342-7330
    Fax: 703-229-4132