The Means Test Used in Determining Bankruptcy Eligibility (Part A)
November 22nd, 2010
After you decide you need to begin the process of filing bankruptcy in Michigan, you will likely be subjected to a Means Test, a tool to evaluate whether you are eligible to file based on your income. The United States adopted this method of eligibility testing with the Bankruptcy Reform Act of 2005.
Filing Bankruptcy in Michigan – Chapter 7 and the Means Test
When filing bankruptcy in Michigan under Chapter 7 the means test backtracks and evaluates the 6-month period before you file to eliminate certain debts. In the means test, two variables are compared are your income versus the median household income in your county (relative to your family size). Your eligibility for filing bankruptcy in Michigan depends on whether your income falls above or below that median household income.For example, if your income is below the median income you may be eligible for filing bankruptcy in Michigan. However, if it is more than the median income, other variables would be taken into consideration to determine your eligibility to file for Chapter 7 bankruptcy.
The Internal Revenue Service (IRS) has created a list of allowances that may be deducted from your income, which includes:
- medical expenses;
- child support;
- telecommunications needs;
- insurance; and
- charitable contributions.
Furthermore, you can subtract payments for loans that are secured such as mortgages and car payments.
Failing the Means Test
Typically, if you end up with about $100 or more after allowable expenses are deducted from your income, you fail the means test. Failing the means test does not automatically rule out your possibility to file Chapter 7, it only suggests that your case should not be approved.
If you fail the means test, your case may be dismissed by the U.S. Trustee. However, your bankruptcy attorney may defend your case by providing evidence of special circumstances such as unexpected medical expenses, student loans or decreased income due to job loss.
Exemption From the Means Test
Not all people filing bankruptcy in Michigan are subject to the means test when they seek to file Chapter 7 bankruptcy. One of the most common reasons the means test is excused is when the debts are not primarily consumer-related debts. Business related debts are also often generally excused from the means test, as are some circumstances for military personnel.
If you are not exempt from the means test and are likely to fail when filing bankruptcy in Michigan with Chapter 7, you may want to discuss the option of filing Chapter 13 bankruptcy instead. An experienced Michigan bankruptcy attorney can help explain and review your options to make an informed decision.