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December 10, 2010

Common Chapter 7 Bankrutpcy Means Test Issues

Chapter 7 bankruptcy is a marvelous remedy allowing the vast majority of people who use it the luxury of canceling many thousands of dollars worth of debt simply by disclosing their property, debts, and income on a set of official forms, making one personal appearance in court (usually lasting a minute or two), and waiting 60 days after the appearance to receive a final discharge from the court. In these types of cases, self-representation works beautifully.

But sometimes Murphy's Law strikes and a successful outcome requires a lawyer's help. The most common outlier issues in Chapter 7 bankruptcy deal with the means test itself. (To learn more about the means test, see my previous blog post, Why the Means Test Separates the 80% From the 20%.)

Ownership Expenses for Cars

For instance, a successful result in the means test may depend on whether you can claim the "ownership" expense for one or more of your cars. Most but not all courts have ruled that you can't claim the ownership expense unless you are making purchase or lease payments on the vehicle. For people with two cars who aren't making payments on them, this judicial interpretation could deprive them of close to $800 worth of expense deductions and easily be the difference between passing and failing the means test. Fortunately the U.S. Supreme Court will finally decide this issue sometime in 2011.

Mortgage Deduction

Another means test issue is whether you can claim a deduction for your mortgage if you have stopped making payments or you plan on moving out of the house. Although it is counterintuitive to count mortgage payments as expenses when you won't be making them, the courts have mostly decided that you can deduct them -- based on how the statute is written. The Supreme Court's future decision on the car ownership case may also clear up this mortgage deduction issue.

Number of People in Your Household

A third common means test issue has been how to count the number of people in your household. The bankruptcy law doesn't define this term and courts are all over the place about whether members of your household must be dependents or whether people living under the same roof also count. Of course the number of people in your household will often determine whether you pass or fail the means test.

There are many more issues about the means test have shown up in Chapter 13 cases. See for a database of Chapter 13 court decisions about these and other issues.

December 8, 2010

Why the Means Test Separates the 80% From the 20%

In previous blogs, I've said that for 80% of Chapter 7 bankruptcy filers, the 2005 bankruptcy law changes won't alter much in their bankruptcy. (See The New Bankruptcy Law: Little Change for Most Debtors (Other Than Pricier Lawyers).) But that leaves 20% of bankruptcy filers, for whom the new laws will make a difference.

So what separates the 80% from the 20%? Simply stated, with a few rare exceptions, about 20% of people who want to file Chapter 7 bankruptcy have made enough money over the previous six months so as to be required to take what's known under the new law as the means test. To learn more about the Chapter 7 means test, see Nolo's article The Bankruptcy Means Test: Are You Eligible for Chapter 7 Bankruptcy?.

The Means Test: Three Steps

The means test has three steps. The first step is to compute your average gross monthly income from all sources (taxable or not) for the six-month period prior to the month in which you plan to file for bankruptcy.

The second step is to compare that average monthly gross income figure with the median gross income for a similarly sized household in your state. If your income is under the median income figure you've passed the means test (in only two steps).

If your income is over the median income figure you must take a test to determine if you would have enough income left over after your allowable expenses to pay down some of your debt in a Chapter 13 plan. If so, you can be forced in a Chapter 13 bankruptcy (or alternatively, have your case dismissed). If not, you are eligible for Chapter 7 bankruptcy (again, with rare exceptions).

Use a Handy Means Test Calculater

Because of the means test, many people believed it would be harder to file for Chapter 7 bankruptcy -- and if they are in the 20% category they would be right. Still, as it turns out, a majority of people who are forced into taking the means test pass it and are eligible for Chapter 7 bankruptcy. And thanks to Albin Reneauer (my co-author on my bankruptcy books, How to File for Chapter 7 Bankruptcy and Chapter 13 Bankruptcy), an easy to use (dare I say fun) free online calculator helps you determine whether you pass or fail the means test. If you want to find out whether you are in the 80% or 20% category on account of the means test, visit, punch in your zip code, enter the average gross monthly income figure for your household, and follow the instructions to complete the test.

Oh, one last word on this topic. Nothing in law is as tidy as I've made it here. Even for people who pass the means test, there may be complications in individual cases that make it difficult to do your own bankruptcy, and that might add a percent or two to the group that needs a lawyer. I'll write more about this in future blogs. Stay posted.

January 8, 2008

Corrected Bankruptcy Means Test Forms Posted on U.S. Courts Website

Update: January 15th, 2008

Be aware that many local courts are still offering the defective "original version" of the fillable .pdf means test forms, rather than the fixed "v2" versions (see below). It does not appear that the U.S. Court System has informed the lower courts that the new forms need to be posted.

I feel sorry for anyone who is trying to use them.

Original Post:
The defective means test forms that were discovered on the U.S. Courts website this weekend and mentioned in this blog two days ago were fixed this afternoon (1/8/2008).

The government quietly replaced the defective forms with ones that work. I tested them. They really do work. Woo hoo!

How can I tell if I have the fixed version of the form?

If you downloaded the January '08 means test form from the U.S. Courts before Tuesday, January 8th, you have an old form and should replace it. The old means test form (version "f") is unusable.

  • OLD = ends with the letter "f" -- > B_022A_0108f.pdf.

  • NEW = ends with the letters "v2" --> B_022A_0108v2.pdf.

Links to the revised, fixed forms:

Official U.S. Courts forms page

Chapter 7 Means Test (Form 22A)

Chapter 13 Income Statement (Form 22C)

January 6, 2008

Error Found in Government's Latest Downloadable Means Test Forms

Update: January 8, 2008

Woo hoo! The problem with the means test forms has been fixed!

But if you were unfortunate enough to have downloaded an early version of this form (before January 8th, around 3pm EST) you were probably driven crazy by the the bug described in the original post below. Relax. You're not crazy. Download the new means test forms. They work. It's all good.

Original Post:

Imagine my surprise yesterday afternoon, while checking out the new official bankruptcy means test forms for Chapter 7 (Form 22A) (.pdf) and Chapter 13 (Form 22C) (.pdf) when I discovered they don't work right. In fact, the bug in the form makes it impossible to fill out correctly.

The problem is with Lines 19A and 39 of official Chapter 7 means test form (22A), and lines 25A and 45 of the Chapter 13 form (22C).

In each case, the first of these lines is the allowance for living expenses. The second of these lines is supposed to be the excess amount of living expenses you are claiming (if any), above and beyond the amount in the first line.

The problem is, the .pdf versions of the forms put the same number in both lines. This is a mistake - the second number is supposed to be the amount in excess of the first, or zero if the actual expenses were lower than the official living allowance.

So, for example, if you switch the amount on line 39, the amount on line 19 changes, and if you go back and change line 19, the value you type also appears on line 39. (The exact same problem happens in the Chapter 13 form, with lines 25 A and 45.)

Programming bugs happen, so as soon as I discovered the problem, I promptly sent an email to The Powers That Be so they can correct it. But for now, the defective forms are still posted on the official bankruptcy forms website run by the U.S. court system.

In principle, the fact that the government is now offering fillable .pdf forms is a great thing; fillable forms make it easier for people to complete them cleanly, without a typewriter (remember those?).

Unfortunately, the current bug makes it impossible to fill out the forms accurately.

While you're waiting for the government to fix the official form, you can get an idea of how you fare under the the new means test form by going to the means test calculator I offer on my site The calculator has been updated for the changes that were introduced January 1, 2008.

In the meantime, be aware that you are NOT crazy. It is impossible to fill in the government's downloadable means test form correctly. And if you know someone who has downloaded the new official forms, warn them about this issue and tell them check back at the official bankruptcy forms site (or this blog) to find out if the problem has been fixed.

December 21, 2007

Means Test Changes May Help Some Consumers, Hurt Others in 2008

If you're a high-income individual living alone and thinking about bankruptcy, you may want to think faster. You may be affected by changes in the means test that take effect in 2008.

Significant Changes in Expense Deductions & Forms Beginning January 1, 2008

Under the new "Expense Allowance" standards used by the bankruptcy courts to determine eligibility, individual filers with above-state-median incomes (say $6,000 per month) will see their monthly means test expense deductions fall by more than $400 per month (from $916 to $494). Such a drop may change the qualification status of many individual filers.

Others, especially those with lower incomes, may actually benefit from the changes. For the lowest income debtors, expense deductions are higher by more than $400 per month. Others may not be affected at all.

Let's take a closer look at all the changes.

Note: Line number references are to Form B22A -- the Chapter 7 means test form, (followed by the line number for Form B22C -- the Chapter 13 form).

Living Expense Deduction No Longer Rises With Income

Perhaps the biggest change coming January 1st is not in the forms, but rather in the tables you use with them -- specifically the "living expense" allowance tables. (For those of you following along at home on Form B22A (B22C), this is the expense deduction amount that goes on line 19 (24) -- soon to be Line 19A (24A). More on that below.)

Bankruptcy courts are required by law to use the IRS's collection standards as part of the means test formula to determine eligibility for a Chapter 7 bankruptcy liquidation, and, for those debtors with income above the state median, to establish a minimum monthly payment requirement if you decide to go with a Chapter 13 repayment plan.

The IRS revises and publishes these "expense allowances" about every six months. They form the foundation of the means test: to determine whether your income is sufficient to pay off any significant part of your debt. But the latest revisions involve far more than just changed dollar amounts. This time, the IRS has fundamentally changed how they compute the living expense allowance that forms the basis of the one of the largest deductions in the bankruptcy means test calculation.

It may surprise some to learn that, under existing standards -- at least until the end of 2007 -- the higher your income, the more generous the amount of the means test living expense deduction. For example, a family of four scraping by on $2,200 a month gets a living expense deduction of $941 while a family earning $4,200 per month gets a $1,203 deduction -- $265 more, for reasons that are not entirely clear.

Well, as of January 1, 2008 there is no more sliding scale for living expenses. It has been replaced by a single, uniform living expense deduction that applies to all across all income levels. Low income debtors will benefit from the changes, as the new uniform deduction is higher than what they get now, but most of these debtors are below the state median income, and therefore qualify for bankruptcy anyway. Higher income debtors lose out, and those in the middle aren't affected as much.

For those on the upper end, a reduction of several hundred dollars per month may mean they'll have to learn to live on less per month if they're filing a Chapter 13 and, unless they were on the borderline of qualifying for Chapter 7, they may not qualify next year, if they can't prove there is a good reason their expenses are higher than the allowances.

Filers with two or more people in their household will not see as great a reduction under the new uniform standard; the most severe reduction is for higher income individual filers living alone. Low income debtors will see larger expense deductions.

Some lower-middle income debtors, who are on the edge of passing or failing the means test under the current standards, may find it worthwhile to wait for the new forms, which have expense deductions that are slightly more generous than the ones currently in use.

Health Care Expense Deduction(s) Changed

A new line in the means test forms now lets you deduct a "health care expense allowance" for each person in your household for whom you pay out-of-pocket health care expenses.

Current forms only have a place for "actual" health care expenses and do not offer an "allowance," as there are for other types of expenses, such as food and clothing.

The revised means test form splits line 19 of the form (line 24 for the Chapter 13 version of the form) into parts A and B. 19A (24A) is the original line 19 (24); 19B (24B) is the new Medical Allowance.

The new line 19B includes a mini-worksheet to determine how much of an allowance you get, depending on the number and age of the people living with and dependent on you. Each person under 65 is worth a $54/month deduction, and those over 65 are worth a $144 deduction per person. Note: this allowance is a uniform national standard that does not vary from county to county.

Meanwhile, Line 31 (36), -- where you used to list your "actual" out-of-pocket medical expenses -- now is only for those expenses that are "in excess of the allowance" you took on Line 19B (24B). (So, if you're converting from the old form, simply subtract the new amount on line 19B from whatever you had on line 31 of the old form, or put zero if the allowance is larger than your actual expense.)

Note that health insurance costs are still deducted separately on Line 34 (39). That has not changed.

Although the new allowance may make the data entry for health care expenses more challenging, the allowance seems to be a win-win for consumers. You are still entitled to deduct the full amount of your actual, documented out-of-pocket medical costs, assuming they appear reasonably necessary. But under the new medical allowance, you get a monthly medical expense deduction even if you don't have documented costs; the new form grants you a standard monthly allowance for that expense.

But, you may be wondering, is this really a new allowance? Or did they just lower some other living allowance and split health care out of a larger "lump" of expenses? Although the living expense allowance has switched from a sliding scale, to a fixed allowance, comparing the two is difficult and will vary from debtor to debtor. However, it appears that the new allowances with the health care allowance added will result in a higher overall deduction for most debtors.

Larger Ownership Expense Deduction for Two-Car Families

In the latest standards, both the "ownership allowance" and the "operation allowance" have increased markedly for your "second" car. This is welcome news. With the growing income gap in America, most families today need two or more jobs just to meet monthly expenses. And so most families need two cars. Under the old standard, the ownership allowance for the second car was substantially less than the allowance for car number one.

Under the new transportation standards, each car gets the full allowance. That is, the allowance for two cars is simply double the allowance for one. This is a welcome change and should help those above-median income debtors who are within a few hundred dollars a month of passing or failing the means test.

Localized Transportation Costs Changed

The transportation operation expense standards have two major changes.

First, they've eliminated some regions that used to get special treatment. People living in metro areas of Cincinnati, Kansas City, Milwaukee, & Tampa now must use the generic regional standards, which are sometimes lower, but not always.

The second change is that the so-called "mass transit" allowance (the expense allowance for people with no autos) has been changed to a uniform national standard of $193, rather than being separately computed for each metro region. For most people, this will be a significant reduction. For example, for car-less residents of New York City, the allowance, as of the first of the year, has been slashed in half from $313 per month to $163 -- about half of what it was.

Should You Wait for the New Form?

With the wide range of the changes coming January 1, it's difficult to make generalizations of how people will be affected. Some will fare better, some worse. One thing is clear: people filing as an individual living alone are in for significantly reduced expense allowances.

The new standards appear to be aimed at reducing the difference between two people filing separately, versus two people filing jointly. Under the old standard, you got significantly better treatment as an individual than as a couple. Now that disparity has been eliminated, for the most part, by lowering expense allowances for individuals, and, in some cases, raising them for two people. The new standards seem to eliminate a "penalty" for joint filers (or a benefit for filing separately, depending how you look at it.)

Across the board, under the new standards, expense deductions for two people are simply 100% more than expense deductions for one, whereas current deduction amounts for two people run only about 70% more.

Can You Start Using the New Forms and Standards Now?

One could make, and some have made, a solid argument that the new forms must be treated as valid now, because the law states that "current" IRS standards are to be used, and these are the only forms that allow for proper application of the new IRS standards, which were updated in October of 2007.

How Can I Compare the Old and New Numbers? (the site I operate) is offering a free beta preview of the 2008 Means Test Calculator that can be used to get a good idea of what your results would be under the new standards. Just enter your zip code and click "Go". When you get to the calculator, click on the link near the top of the page that takes you to the beta preview of the 2008 version.