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The means test is a formula that is utilized to determine whether an individual qualifies for Chapter 7 bankruptcy or whether they are considered above median income, requiring them to file a Chapter 13 bankruptcy. The means test became effective in until October, 2005 when the bankruptcy laws were changed. It is essentially a screening process that is designed to capture higher income earners and direct them to filing a Chapter 13, if they’re above median income Debtors.

Is The Means Test Just For Chapter 7 Bankruptcy Or Is It For Chapter 13 As Well?

The means test applies in both Chapter 7 and Chapter 13 bankruptcies. In a Chapter 7 case, if the test is not passed, the case could be presumed abusive and subject to a dismissal motion by either the Chapter 7 trustee or the United States Trustee’s Office. If an above median income debtor elects, after not passing the means test, to file a Chapter 13, the means test is the primary formula applied to calculate the percentage distribution to that debtor’s creditors in their case.

What Are The Income Requirements To Pass The Means Test?

The means test starting point is median family income data based upon household size. For instance, in New Jersey, one earner household income under the means test would be $68,349 while a family of four would be $125,465. The median income is a major factor but there are many other components to the test, including an inclusion of household income for a non-filing spouse and also application of national and local standards for monthly expenses pursuant to the IRS guidelines.

How Do My Children Count In The Means Test?

Minor children, under the means test, will almost always be considered as dependents of the household. The number of children and other dependents such as elderly parents in the home are an important part of correctly determining the household size. The correct number of persons to use in completing the means test calculations has been somewhat confusing since the 2005 amendments to the bankruptcy code. There are three standard applications for determining the correct household size: the census approach, the IRS dependency approach, and the economic unit approach. Under the census approach, children being supported by parents count because they’re residing in the household. If individuals are away at college and still being supported by the parents, those individuals are still dependents and parents can claim them as household members, even though they reside at school.

Under the IRS dependency approach, the test essentially mirrors the determination of whether a household member can be claimed as a dependent on a debtor’s income tax return. Under the economic unit approach, bankruptcy courts that differ in judicial philosophy in the application the first two tests have fashioned a third test considering whether the individuals in the household are part of the economic unit. I have had a number of different cases where elderly parents living within the household of the debtors clearly classify as an additional household member, although they might not fit as a dependent on a tax return.

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