Much has been written about the means test since it was enacted as part of the 2005 amendments to the Bankruptcy Code (also known as the BAPCPA). (For an excellent explanation of what the means test is, see Lori Patton’s recent contribution here).  However, its application is often poorly understood by individuals who are considering bankruptcy, and in some cases even by bankruptcy attorneys.  This may be, in part, because the means test is not a problem in most bankruptcy cases; according to one report, 94% of the people filing for bankruptcy had incomes below their state’s median income; the means test was simply not an issue in those cases.

The current economic downturn may be altering this trend.  Recent conversations we have had with prospective clients suggest that many households are going through rapid and extreme financial changes, leaving many families and individuals in a gray area where their six-month average income is above the median, but they clearly need some kind of help due to a recent job loss, business failure, health problem (perhaps coupled with a loss of insurance secondary to a job loss), or other issue.  In some cases a thorough understanding of the “long form” means test (a term that I have borrowed from Ms. Patton’s aforementioned article) can be the key to getting these individuals the protection they need under Chapter 7.

Assuming your six-month average income is above the median, “long form” means testing directs you to a section entitled “Calculation of Deductions Allowed Under § 707(b)(2).”  This section consists of several subparts. Subpart A (deductions under standards of the Internal Revenue Service) calculates what the local expenses would be for a household of a particular size, as determined by the IRS.  These deductions are not based on the debtor’s actual expenses but rather, are based upon tables which are periodically updated by the government (as I discussed here).  These expenses include general living expenses, such food, clothing, household supplies, personal care, housing and utilities, rent or mortgage expense, and transportation expenses.  If you are paying a mortgage, a car loan or lease, 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. Subpart A 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.

Next, Subpart B (entitled “Additional Expense Deductions under § 707(b)”) deals with actual expenses for health insurance, disability insurance, and health savings account expenses; contributions for the care of immediate family members who are disabled, chronically ill, or elderly; expenses incurred to maintain the safety of family members under the Family Violence Prevention and Services Act; home energy costs above that allowed by the IRS; limited monthly educational expenses for dependent children; additional food and clothing expenses over and above that allowed by the IRS data; and continued charitable contributions.  After that, Subpart C (“Deductions for Debt Payment”) deals with required payments for secured debts and priority debts (debts that are not secured, but important debts that are not dischargeable, such as child support and alimony payments).

Finally, as Ms. Patton recently discussed, even debtors who fail the “long form” means test may still qualify for Chapter 7 in light of “special circumstances” or “totality of the circumstances.”

Whether the aforementioned deductions apply to a particular case, and whether they will be sufficient to qualify a “high wage earner” (i.e., someone who is above the six-month median) for Chapter 7 can be complicated issues which should be discussed with a bankruptcy attorney in your jurisdiction.

-Drew Broaddus