In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act, known more familiarly for its unwieldy acronym/nickname, BAPCPA (pronounced “bap-see-pa”). One of the critical, and most criticized, inventions of BAPCPA was the creation of the “means test.” The key principle behind the means test was the idea that individuals with high levels of income should not be allowed to file bankruptcy. In theory, the means test component would eliminate some abusive and unnecessary bankruptcy filings—in practice, the means test served to complicate bankruptcy filings.
Suffice it to say that the means test is one of the more complex aspects of modern bankruptcy practice. A full explanation of the means test is beyond the scope of one blog post—please consider this post a primer on the means test. If you are uncertain about means testing or whether you would be able to pass a means test, the best thing to do would be to contact our office and talk to our bankruptcy attorney. We offer a free bankruptcy consultation, part and parcel of which is consideration of your ability to pass the means test.
The Threshold Question (the CMI Test)
The threshold question for means testing purposes is whether your household current monthly income is less than the median income for a household of your size in North Carolina. This is commonly called a CMI determination. This determination has a couple of nuances: first, figuring out your household size in North Carolina can be tricky. For those households with complex living situations, it can be difficult to determine household size without the advice of an attorney.
Current monthly income is a product of the bankruptcy code, and one which is not necessarily an accurate indicator of your “current” income. Current monthly income considers your gross income over the last six months. For calculation of current monthly income, you do not consider the month in which you are filing, but the six months preceding the month of filing. If your income has fluctuated over that six-month period, the means test requires that you average your gross income over that six-month period and then annualize it for the comparison to NC’s median income for your household size. Median income numbers fluctuate, but you can find the most current numbers here.
Well that Was Easy
Not so fast. It is very common for debtors to fail to consider all sources of income in calculating their current monthly income. It is important to include all sources of income over the last six months, excluding those funds received from the Social Security Administration. Some commonly excluded income sources that should be included are pension/retirement income, support from family members, income of children contributing to the household, child support, 401(k) and retirement withdrawals, self-employment income, dividends or investment income, and rental income. It all has to be included before making your threshold determination for means testing.
My Income is Too High—What about my Expenses? (the DMI test)
If you do not pass the threshold CMI test, you do not necessarily fail the means test. There is a secondary test that allows you to make certain deductions from your CMI to reach a determination as to your disposable income. This is commonly called a DMI (Disposable Monthly Income) test. For a DMI determination, you must reduce your CMI by certain actual and imputed expenses. The actual expenses include income taxes paid, monthly payments for mortgages/rent, monthly payments on vehicles, monthly payments on other secured debt, average monthly charitable contributions, and payments on prepetition priority claims (ex. child support and/or alimony). Imputed/standardized expenses are determined by IRS standards and include deductions for food, clothing, utilities, transportation, healthcare, childcare, and insurance. After taking deductions, if your DMI, multiplied by sixty, is less than $7,475.00, then you have passed the means test.
If your DMI times sixty is more than $12,475.00, than you have not passed the means test and there is a presumption of abuse in the event that you file bankruptcy. If your DMI times sixty is between $7,475 and $12,475, then a third means test section asks whether your DMI times sixty equals more than 25% of your unsecured debts. If it is less than 25%, than you will pass the means test.
If you followed most of the above, you should have a good sense of how the means test works. We strongly discourage, however, completion of means test without the aid of an attorney. Be careful of online means test calculators as well. Every potential bankruptcy filing has intricacies that make means testing variable. Importantly, just because you pass the means test and qualify for a bankruptcy, doesn’t mean that bankruptcy is the best option for you. As mentioned above, our firm offers a free consultation for clients interested in learning more about bankruptcy. Give us a call today to set up yours (336-996-4166).