Taking Advantage of the Rigidity of the Chapter 7 “Means Test”
Posted by on January 13, 2019 under Bankruptcy Blog | 
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Because of how precisely the amount of your “income” is calculated, filing bankruptcy just a day or two later can make all the difference.
Passing the “Means Test”
“Income” for purposes of the Means Test includes income from any source except monies received under the Social Security Act. It includes income from irregular sources such as child and spousal support payments, insurance settlements, cash gifts from relatives, and unemployment benefits. Also, the Means Test is time-sensitive in that it is based on the amount of money received during precisely the 6 FULL CALENDAR months before the date of filing. This means that your “income” can shift by waiting just a month or two.
Why is the Definition of “Income” for the “Means Test” So Rigid?
One of the much-touted goals of the last major amendments to the bankruptcy law in 2005 was to prevent people from filing Chapter 7 who were considered not deserving. The most direct means to that end was to try to force more people to pay a portion of their debts through Chapter 13 “adjustment of debts” instead of writing them off Chapter 7 “straight bankruptcy.”
The primary tool intended to accomplish this is the “means test,” Its rationale was that instead of allowing judges to decide who was abusing the bankruptcy system, a rigid financial test would determine who had the “means” to pay a meaningful amount to their creditors in a Chapter 13 case, and therefore could not file a Chapter 7 case.
The Unintended Consequences of the “Means Test”
If your income is at or under the applicable median income, then you generally get to file a Chapter 7 case. If your income is higher than the median amount, you may still be able to file a Chapter 7 case but you have to jump through a whole bunch of extra hoops to do so. Having income below the median income amount makes qualifying for Chapter 7 much simpler and less risky.
Filing your case a day earlier or later can matter because of the means test’s fixation on the six prior full calendar months.
So if you receive some irregular chunk of money, it can push you over your applicable median income amount, and jeopardize your ability to qualify for Chapter 7.
An Example
It does not necessarily take a large irregular chunk of money to make this difference, especially if your income without that is already close to the median income amount. An income tax refund, some catch-up child support payments, or an insurance settlement or reimbursement could be enough.
Imagine having received $3,000 catch up support payment on July 15 of last year. Your only other income is from your job, where you make a $42,000 salary, or $3,500 gross per month. Let’s assume the median annual income for your state and family size is $45,000.
So imagine that now in January, 2019, your Chapter 7 bankruptcy paperwork is ready to file, and you would like to get it filed to get protection from your aggressive creditors. If your case is filed on or before January 31, then the last six full calendar month period would be July 1, 2018 through December 31, 2018. That period includes that $3,000 extra money you received in mid-July. Your work income of 6 times $3,500 equals $21,000, plus the extra $3,000 received, totals $24,000 received during that 6-month period. Multiply that by 2 for the annual amount—$48,000. Since that’s larger than the applicable $45,000 median income, you would have failed the income portion of the “means test.”
But if you just wait to file until February 1, then the applicable 6-month period jumps forward by one full month to the period from August 1 of last year through January 31 of this year. That new period no longer includes the $3,000 you received in mid-July. So your income during the 6-month period is $21,000, multiplied by 2 is $42,000. This results in your income being less than the $45,000 median income amount. You’ve now passed the “means test,” and qualified for Chapter 7.
