Bankruptcy Means Test, Part 1: Current Monthly Income

One of the more publicized changes is the addition of the “means test” to determine eligibility for a consumer to file a Chapter 7 bankruptcy. The purpose of the means test is to require consumer debtors who have the ability to do so to make some payment toward their unsecured debts and to make those payments via a five-year Chapter 13 repayment plan.

The means test scrutinizes debtors having income more than the median income in their state. If debtors earns more than the median income for their state, then their reasonable and necessary expenses (using IRS collection guidelines) are considered. If, after the analysis under the means test, debtors can pay more than $100 of disposable earnings, the debtors are presumed to be illegible for discharge of their debts under Chapter 7 and may be forced into a five-year payment arrangement of their disposable income under Chapter 13 of the Bankruptcy Code.

Information needed to compute the means test:

income information for the past six months (not only wages of the husband and wife, but also contributions from others towards the expenses of debtor's household)
amount of expenses, including secured debt
amount of debt

"Current Monthly Income" is money actually received (excluding Social Security benefits) during the applicable six-month period, averaged on a monthly basis. The sources of income include:

the earnings of the members of debtors’ household
contributions from others toward the expenses of debtors’ household
rents and other real property income
net business income (gross business income minus gross business expenses)
interest and dividend income, pension and retirement income, and child support or spousal support

There are issues as to what else may or may not be included in Current Monthly Income. For example, the income of a non-filing spouse is included, unless the debtor signs a sworn statement that the spouses are legally separated or living apart. Also, for now, Current Monthly Income includes the income of roommates and live-in significant others.

Once the Current Monthly Income is calculated, this the first opportunity to determine if the Presumption of Abuse applies. There is no presumption of abuse if the debtor’s Current Monthly Income does not exceed the median income of the applicable state.

Arizona Median Income, as of February 2006:

Persons	Income
1	$36,856
2	$48,003
3	$53,089
4	$60,160
Add $6,300 for each individual in excess of four

If Current Monthly Income exceeds the presumption, then the next step is to calculate expenses. See Means Test, Part Two: When the Debtor's Income Exceed the State’s Median Income.