- How the Bankruptcy Means Test Works
- The Means Test: Passing vs. Failing
- So What Is “Income” for Means Test Purposes?
- Top 5 Easy-to-Forget Means Test Income Sources
- Means Test Income: The Bottom Line
The bankruptcy Means Test serves different purposes depending upon whether you are filing Chapter 7 or Chapter 13 bankruptcy in Michigan.
In Chapter 7 bankruptcy, it is the mathematical formula that determines whether or not you are eligible to file Chapter 7 at all.
In Chapter 13 bankruptcy, it is the mathematical formula that determines the length of your Chapter 13 payment plan and also whether or not there is some minimum amount of money you must repay your unsecured creditors through the bankruptcy process.
The Means Test is an averaging of your annual household income, essentially. The outcome of the Means Test results from a comparison of that average to the average income in your part of Michigan (or other state) for a household of your size.
Thus, the accuracy of the Means Test’s result is highly dependent upon the accuracy of the income data input into its formula.
This Article will list a few surprising source of funds that you may have which are included as “income” for Means Test purposes—even though your instinct may be that these funds do not count as “income” and should be left out.
First, let’s discuss the mechanics of the bankruptcy Means Test in detail.
How the Bankruptcy Means Test Works
As mentioned above, the bankruptcy Means Test is, in essence, an averaging formula.
How does this averaging occur, exactly? And what exactly is being averaged?
To answer the second question first, “income” is being averaged. However, as we’ll go on to explain, that is a loaded legal term in the bankruptcy process.
We’ll explain by being more specific.
You must, per Federal law, disclose all income earned from all sources other than Social Security Act (SSI, SSD, and some Veterans’ benefits) earned by all members of your household within the 6 months prior to the month in which you file your bankruptcy case.
Yes, that includes your spouse’s income. Even if he or she is not filing the Chapter 7 or Chapter 13 jointly with you. Your spouse’s income must be included in your Means Test, even if he or she is unwilling to provide the information.
Thus, if you earn an hourly wage at McDonalds but are married to a hedge fund manager with 19 summer homes in the Hamptons, your Means Test results will feel very unfair to you! (Also, question why the hedge fund manager making you work at McDonalds and discuss with a close friend!)
The income that is input into the Means Test is, further, your gross income. That is, the full amount earned prior to any tax, retirement, or other deductions.
The Means Test then averages that 6 months’ worth of income data. It then multiplies that average number by 12 (months) to arrive at what it thinks your annual household gross income is.
Once the Means Test has computed that number, it compares it, finally, to the median income in your part of Michigan for a household of your size.
The Means Test: Passing vs. Failing
If your household gross average income is above that median number, you must proceed to apply a series of statutory deductions to the result. The purpose here is to claw back some of that gross income to see if you are, afterward, then under the median number.
The US Bankruptcy Code allows for a number of these Means Test deductions. There are statutory deductions for taxes you’ve paid, health savings plan payments, child care expenses, the operation of your vehicle, and a number of others.
However, they are not limitless. And they do not mirror, necessarily, your “real life” monthly budget expenses.
If, after your Michigan bankruptcy attorney applies all of the available deductions, you are still “above-median,” you have “failed” the Means Test.
In a Chapter 7 context, that means that you are not eligible for Chapter 7 (thanks a lot, Hedge Fund Manager!) and must file a Chapter 13 instead.
In a Chapter 13 context, this means that you must draft, with your lawyer, and file a 5-year rather than shorter Chapter 13 payment plan.
It also means that there may be some minimum amount of money that your unsecured creditors must receive from your Chapter 13 plan in order for that plan to be approved by the Bankruptcy Court. (Otherwise, there is no minimum that unsecured creditors must receive from a Chapter 13.)
So What Is “Income” for Means Test Purposes?
As noted above, “income” for Michigan Means Test purposes is—almost any money received. Almost.
Social Security age benefits and disability benefits are not “income” for Means Test purposes, as noted. Certain Veterans and Railroad Workers benefits are also not “income” for Means Test purposes.
There are very few other exceptions to the rule that, if you received it within the 6 month Means Test “look-back period,” it must be disclosed and included in your bankruptcy Means Test.
However, there are a handful of income sources that do frequently confuse potential bankruptcy filers in Metro Detroit.
These Means Test income sources are discussed below.
Top 5 Easy-to-Forget Means Test Income Sources
Do you earn your income “under the table?” The IRS won’t appreciate that. And the US Bankruptcy Court will not enable your tax fraud.
You need to disclose all of your income whether it is paid via check, direct deposit, or cash, reported or unreported to the IRS or Michigan Treasury.
“Who’s gonna know?” you ask?
Disparities in your bank statements, tax returns, and Means Test disclosures are very easy for Chapter 7 and Chapter 13 Trustees, and the United States Trustee (who can prosecute you criminally for Bankruptcy Fraud) to unearth.
Further, just asking that question will lose you the assistance of every halfway decent bankruptcy attorney in Michigan.
What about the $50 in the Christmas card from grandma?
That may be a “gift” rather than cash if it was one-time, not in return for labor, and if it meets other requirements. This should be discussed with your bankruptcy attorney. You should never assume that any cash received is not income until your lawyer tells you that it is not.
Michigan Unemployment Benefits
Michigan unemployment benefits payments are income for Means Test purposes. This is well-settled. All U/E benefits received within the 6-month look-back period must be disclosed.
No longer receiving them? The benefits have run out, and you’re still not employed? Do you still have to disclose those historical benefits receipts?
The answer to that last sub-question is, “Yes.” However, this sort of question is why you need an experienced Metro Detroit bankruptcy attorney to assist you.
It may be possible to deduct that gross unemployment benefits income from the Means Test gross average pursuant to a decision of the US Supreme Court.
But it always has to be disclosed, first.
Interest, Dividends, and Royalties
Do you earn income by way of interest on accounts, bonds, stock dividends, or even royalties for that fantasy novel you self-published and sell on Amazon?
Even if the amounts of such proceeds are not great, they are indeed “income” for Means Test purposes.
The potential for such forms of income are, in fact, enormous. That hedge fund manager referenced above, for example, probably earns little to nothing on paper in the form of “wages.” Instead, he or she will largely earn millions per year in the form of stock dividends and so forth.
As far as royalties go, they may be nothing one month—but then your track goes viral on TikTok, etcetera, and you earn big bucks the next month.
How about that stock you got for free for joining Robinhood.com? You don’t pay much attention to it, but where is the stock value today? Did that company just release an earnings report? Pay out a dividend?
Even if it’s just $0.23 cents, sitting unloved in your digital account, you need to disclose and include in your Means Test.
Gambling and Lottery Winnings
Did you win $5 in the Powerball drawing 2 months ago? You have to report it.
How about $1.5 billion in the MegaMillions?
Small or large amounts, gambling winnings of any sort—including the Michigan lottery—must be disclosed and are income for Means Test purposes.
It doesn’t matter if you lost money the same month. Gambling is not a business in which losing money can be characterized as a monthly expense negating any “profit.” You’ll report your gambling losses elsewhere in the Bankruptcy Petition.
Did you just settle out a personal injury lawsuit? Did you receive a $5 check for your participation in some nationwide class action lawsuit?
If so, these funds are income for Means Test purposes and must also be reported and disclosed.
Means Test Income: The Bottom Line
The bottom line is that, if you are not yourself a bankruptcy attorney, you should not presume that there is any source of income or that any funds received should not be included in your Chapter 7 or Chapter 13 Means Test.
It may be the case that a specific payment received is not, in fact, Means Test income or can be deducted from your gross—but these are decisions for your bankruptcy attorney to make on your behalf. This decision will be based on a thorough knowledge of the US Bankruptcy Code, the local rules of Michigan’s Bankruptcy Courts, and local and Federal case-law on the subject. It will be based on years of experience handling such issues (unless you opt to retain an attorney with the lowest price-tag in town—and likely the least amount of practical experience).
If you have questions, don’t DIY your bankruptcy. Consult an expert to find out what your options for Chapter 7 or Chapter 13 bankruptcy in Michigan truly are.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has assisted thousands of Metro Detroit Chapter 7 and Chapter 13 clients for over 30 years.
If you are considering filing for bankruptcy, contact us now to schedule your free initial consultation.