The Bankruptcy Code looks to median household income figures compiled by the U.S. Census to determine whether or not you have the “means” or capacity to pay back some or all of your bills.   Means testing was introduced into the consumer bankruptcy process in 2005.

The chart below summarizes the impact of the revised numbers:

The impact of this change is most pronounced on two person and three person families.   Lower median income numbers mean that more filers will end up in Chapter 13 since anyone “above median” will be presumed to have enough money to pay back creditors in a Chapter 13.  Chapter 13 cases filed using the new numbers will also result in higher monthly trustee payments because the amount of funds “available” to pay back creditors will be higher.

Above median debtors are not without hope – those filers can still qualify for Chapter 7 under part 2 of the means test, but that process puts more scrutiny on a filer’s budget and adds to the complexity of the filing.  Read more about the forthcoming change to the median income tables on the Bankruptcy Law Network, where my colleague Jill Michaux has posted an article entitled “The Means Test Gets Meaner.”

Bottom line:  if you are considering Chapter 7, look closely at that option prior to November 1, 2010 or risk an unpleasant post-Halloween surprise.

If you are over median, then a presumption of abuse arises as to your eligibility for Chapter 7 and we must proceed to perform additional calculations (these additional calculations are called the “means test.”).

The addition of the median income and the means test to the consumer bankruptcy process has made bankruptcy a lot more complicated both for lawyers and for individuals.  I know several lawyers here in the Atlanta area who used to handle bankruptcy cases, but no longer do so because of the complexity of the median income/means test process.  I personally think it is absurd that bankruptcy has become so complicated that a reasonably intelligent person would have almost no chance at figuring out the calculations.  If there was ever a reason to avoid non-lawyer “petition perparers” this would be it.

Click on the link to see the current median income table for Georgia.

In any case, I did find an online tool that will allow you to calculate your median income.   If you are so inclined, you can download this tool as an iPhone app!  While obviously not a substitute for legal advice, this tool, created by a Massachusetts bankruptcy law firm, may help you get a sense of where you stand in terms of Chapter 7 eligibility.

Here is a comparison table

Current Median Income Numbers            Median Income numbers
after November 1, 2009

Family size

1                                $40,760                                  $40,691

2                                $54,054                                  $55,258

3                                 $61,959                                  $61,104

4                                 $71,554                                  $68,502

Let’s consider how this change affects you if you have a family of 4.  If you file by October 31, 2009, you can have household income of $71,554 and still qualify for Chapter 7 without having to qualify under the means test.  As of November 1, 2009, if you earn $71,554, the presumption of abuse arises and you must try to qualify by rebutting the presumption using the means test.

If your six month average gross income (April-September) is close to the current median income numbers and you expect the May-October numbers to be similar, it may make sense to try to file prior to November 1 – or at least to discuss this possibility with your lawyer.

If you are computer savvy I would almost suggest that you download the BestCase trial version (full featured except that it prints  “demo” on the output) instead of the Nolo version.  I supect that the folks at Nolo assume that most prospective debtors will get frustrated and call one of the lawyers who buy advertising space at the Nolo site!

In any case, here are links to both the Nolo calculator and to the BestCase download:

Nolo means test calculator

BestCase petition preparation program with means test calculator

I don’t always have the answers but I can usually think through one or two likely scenarios.  I can be more effective helping you if you give me the information I need.   Specifically that means the following:

• take the time to complete my intake questionnaire in its entirety.  Don’t leave out information that you believe is not relevant.   My intake questionnaire is keyed to my bankruptcy program and I have been developing and updating it for over 15 years.  Everything on my questionnaire is there for a reason – and I can serve you better if I have everything that is requested there
• get me copies of your credit reports.   AnnualCreditReport.com offers a free service to get current copies of your credit reports.  Current credit reports help us avoid leaving out creditors from our analysis and they can also provide other helpful information such as prior addresses and other names in which you have been extended credit
• get me copies of all payment advices for the past 7 months.  The Bankruptcy law now requires all debtors to engage in a median income test as well as a means test analysis.  The starting point of this analysis is evidence of income you and other members of your household have received.   Payment advices should be provided for salaries, investment income, one-time checks, some disability payments, dividends, etc.  If you are not sure, ask.

Sometimes I hear from clients who want to submit their information on a spreadsheet or Quicken file.   Feel free to send those files along, but do not send them in lieu of my questionnaire and the other requested information.

While it would seem that the number of people in your family ought to be easy to calculate, it turns out that issues do arise relating to this very important calculation.

I recently received an email from a blog reader named Sheila who asks the following law school exam type of question:

I have been told conflicting things about determining household size for purposes of the chapter 7 means test.  My 20 year old son currently lives with me for free. He will probably move out in the next couple months.  My 18 year old daughter lives with me, but will be going away to college in the fall. A divorce decree allows my ex-husband to use her as a dependent for tax purposes.   My 16 year old daughter lives with me and is my dependent for tax purposes.  How do I determine my household size for the purpose of the means test?

Here is my response: First, I think that Sheila’s question calls for legal advice, which I cannot offer on this blog.  I do not know the location where Sheila may be filing, so I have no way to research the family size issue for her jurisdiction.  However, I can help identify some of the issues that Sheila and her lawyer ought to think about.

• 20 year old son – if the 20 year old son is living with her at the time of filing and has no definite plans to move out, I think that there is a good argument to count him as part of the household for means test purposes.  If he is working, however, his income may be included as part of the household gross income.  If his income is included for median income test purposes, I think you could make an argument that because he is not part of the filing, his separate expenses should count as line item expenses that reduce disposable income on Form 22 (the means test).  You would definitely want to see if there are any circuit court or bankruptcy court holdings regarding this issue in your jurisdiction.
• 18 year old daughter – because the ex-husband claims the daughter as a dependent on his tax returns, it may be difficult for Sheila to include the daughter as a member of the household.  Several years ago, a Northern District of Georgia bankruptcy judge ruled against me on this issue, finding that the income tax dependency was a deciding factor.  In that case, however, the college age child was not living with my client.  Here, it appears that Sheila’s daughter lives with her, eats her food, consumes electricity and gas, Sheila may have a contrary argument.  This might be an issue that Sheila’s lawyer will have to argue.
• 16 year old daughter – I think that Sheila can count the 16 year old as a member of her household

So, Sheila’s household could be as small as 2 or as large as 5 depending on how her bankruptcy judge rules on the household size issue.  Her lawyer is going to need to research this issue for holdings in the jurisdiction where this case might be filed, and he/she may need to present arguments if there is no binding precedent.

Unfortunately this means that Sheila may be a “test case” for this household size issue.

How should the median income calculation deal with Christmas bonsues?  If we read the Bankruptcy Code literally, a Christmas bonus will distort your median income calculation if you file your case in January, February, March, April, May or June.  A June filing, for example, would look at gross income during December through May to generate a monthly average.  A July filing, by contrast, would look at gross income for January through June, and not count any Christmas bonuses.

If your household income is close to the median income test limit, you may find yourself waiting until July to file a case that otherwise could have been filed earlier.

My Bankruptcy Law Network colleague Jed Berliner recently wrote about a Massachusetts bankruptcy case in which the judge ruled that Christmas bonuses could be given pro rata treatment over twelve months, meaning that there would be no first half of the year penalty.  At the same time, of course, this interpretation means that July though December filers would not get the benefit of keeping the bonus out of the calculation.

I am not aware of any circuit court appeals cases that have ruled on this issue.  I suspect that it is only a matter of time, however.  There is also a related issue – should a bonus be included in the calculation at all given that bonuses are not guaranteed in the first place.

In the interim, I will offer my clients the option of giving Christmas bonuses the pro rata treatment for cases I file during the first part of 2009.  We’ll see if the U.S. Trustee seeks to challenge this interpretation.

How can I file chapter 7 by myself without paying someone, anyone $ 99.00 $199.00, $299.00 etc… Three different people( with a financial intrest of course) said representation is required.

Here is my response: Jim, you certainly have the right to file a Chapter 7 case by yourself.  The forms are available either on-line or at an office supply store.  There are also several books about how to do this.  I am currently reviewing a book entitled The Complete Chapter 7 Personal Bankruptcy Guide by attorney Edward Haman that is published by Sphinx Publishing that is quite comprehensive.

Here are the issues:

1. the bankruptcy process has become significantly more complicated since October, 2005, when the BAPCPA changes to the bankruptcy laws were enacted.   I know a number of lawyers who used to file the occasional Chapter 7 here in Atlanta, but who have now given up the practice because of the complications.  In particular, you need to fully understand how the median income test and the means test works – if you do the calculations incorrectly, you could end up in a deposition at the United State’s trustee’s office, face a motion to dismiss or face a motion to convert to Chapter 13.

2. you need to understand about the pre-filing credit counseling requirement as well as the pre-discharge financial management course requirement

3. in order to actually file your case, you will need to go to the Clerk of Bankruptcy Court and scan your pages to get your case filed.  I suspect that this process is not particularly complicated, but I have not used the scanning equipment at the Clerk’s office.

4. you cannot dismiss a Chapter 7 voluntarily if you change your mind.  For example, if you file, but it turns out that you earn too much or own too many assets the judge may not let you out of your case, at least until after your assets are liquidated.

5. you need to understand how the Georgia exemption law works and how it applies in Chapter 7 to protect property that the law allows you to protect.  If you don’t properly declare property as exempt even if the law would otherwise allow you to protect it, then you could lose your property anyway.

6. do not expect to receive advice from the Chapter 7 trustees or the U.S. Trustees.  Their interest is to maximize the recovery of the estate (i.e. your creditors).

While folks contemplating bankruptcy obviously do not have a lot of money, I think that in most situations the complexity (which, no doubt is unnecessarily complex) makes a pro se filing a mistake.

My Bankruptcy Law Network colleague, Michael Doan, has posted a very useful article about the timing of filing.  Specifically, Michael points out that if you start the bankruptcy information gathering process towards the end of a month, and the process rolls over to the next month, then a lot of the work has to be redone.  For example, the six month medican income test look back would involve a new six month period, your credit counseling certificate validity date may run out and the required tax return might change.  I encourage you to take a look at Michael’s well thought out post entitled "File by the End of the Month or Start Over."

I think that in a big picture sense, what Michael is saying is that you need to communicate regularly and accurately with your lawyer.  If you meet with your lawyer on the 20th of the month and promise to have all necessary documentation by the 27th, but you end up rescheduling your appointment to the 5th of the following month, don’t be surprised if you have to pay a higher fee to account for all the new calculations.

In my practice, I do not start the time consuming process of analyzing pay stubs and figuring out the median income and/or means test until I have pretty much all of the required documentation.  This means that I can’t give my client bottom line numbers unless and until my client provides me with pay stubs and tax returns.  I can still give a "big picture" analysis based on my experience, but the actual number crunching has to wait.   This is a major shift from pre-BAPCPA practice where I could run numbers almost immediately.

Some of my colleagues are more willing to tolerate the risk of not getting documentation in time and they end up running their calculations two or three times.  If you are a lawyer and this is how you have set up your practice, I would advise you to keep your notes so at least your’ll have a head start on the calculations.