- Means Test Mistake #1: Household Size Just Means My Spouse & I, Right?
- Means Test Mistake #2: I Include Just My Take-Home Pay, Right?
- Means Test Mistake #3: My Babysitting Money Doesn’t Count as Income, Right?
- Means Test Mistake #4: I Can Just Round My Childcare Deduction Up a Bit, Right?
- Means Test Mistake #5: What Safe Harbor Provisions?
- Top 5 Bankruptcy Means Test Mistakes: The Bottom Line
The Bankruptcy Means Test is a component of a Chapter 7 or Chapter 13 bankruptcy petition that determines a number of important factors in your bankruptcy filing.
First, for Detroit Chapter 7 bankruptcies, the Means Test determines whether or not your are eligible to file Chapter 7 at all.
For Chapter 13 bankruptcies, the Means Test determines both the length of your Chapter 13 bankruptcy payment plan and also the amount you must repay to creditors in a Chapter 13 bankruptcy.
The Bankruptcy Means Test is, on the face of it, just a form (or set of forms) to be completed with certain numbers like many other legal forms in the world. In reality, however, the Means Test is a legal pleading drafted with loaded legal terminology and governed both by a Federal statute (the US Bankruptcy Code) and by the directives of hundreds and hundreds of Michigan Bankruptcy Court, Sixth Circuit Court of Appeals, and US Supreme Court judicial decisions.
The Means Test is not what it appears to be, in short. For the inexperienced or non-bankruptcy lawyer and for the non-lawyer layperson alike, it is full of pitfalls.
This Article will discuss 5 of the most common mistakes that rookie Means Test drafters will tend to make when attempting to complete and file a Chapter or Chapter 13 Means Test in Detroit without the guidance of an experienced Michigan bankruptcy attorney.
Means Test Mistake #1: Household Size Just Means My Spouse & I, Right?
The purpose of the Means Test, very generally, is to average the income earned by the filing bankruptcy debtor (or joint debtors) on a household basis—and then to compare that household average income to the median income for a household of that size in its geographic area.
If the household income is below that median average number, the debtor is eligible to file for Chapter 7 bankruptcy.
Likewise, in a Chapter 13 context, the below-median debtor would be eligible to file a 3-year rather than a 5-year Chapter 13 payment plan. Further, in Chapter 13, that below-median debtor is likely to have no minimum amount that it must repay to his or her unsecured creditors in order for the Chapter 13 plan to be approved by the Bankruptcy Court.
If the debtor’s household is “above-median,” further calculation is necessary to determine any of these things. (See below for more discussion of that calculation.)
In other words, for that debtor, much rests on this income calculation—and on the question of what, exactly a “household” is for Michigan bankruptcy Means Test purposes.
For the non-lawyer, it is an easy mistake to make to presume that “household” means just you, if unmarried, or just you and your spouse, if you are married.
This is kind of how tax returns work, right? What’s the difference in bankruptcy matters?
There is a big difference. Who is and who isn’t a household member for tax-filing purposes has nothing to do with a Chapter 7 or Chapter 13 bankruptcy filing.
Tax rules originate with the US Tax Code and Internal Revenue (or Michigan Department of Treasury) rules and regulations. The bankruptcy process and everything that happens within it is governed by a totally separate Federal statute, as noted above: The US Bankruptcy Code.
Who is and who is not a “household member” for Means Test purposes?
Is it your long-term, cohabitating girlfriend or boyfriend? How about your mother-in-law living in your guestroom? How about your teenager daughter’s under-employed boyfriend whose parents kicked him out of his own house? What about the rent-paying lodger in your attic room? How about your own 19-year-old child?
The short answer is that you need a bankruptcy lawyer to tell you whether any of these people are “household members” for Means Test purposes. The answers will be governed by local case-law arising from Michigan Bankruptcy Court, Eastern and Western Federal District Court, Sixth Circuit Court of Appeals, and Supreme Court rulings. You, the non-lawyer, will not successfully Google this information.
Attempts to take an inexpert stab at this question result in a great many Means Test mistakes.
Means Test Mistake #2: I Include Just My Take-Home Pay, Right?
The Means Test requires that you input all income earned from all household members for each of the 6 months prior to the month in which you file your Detroit Chapter 7 or Chapter 13 bankruptcy.
That is, if you are filing your bankruptcy case in December, you would include all income earned by everyone that your bankruptcy lawyer tells you is a household member for the months of June, July, August, September, October, and November.
The income amounts that you enter into the Bankruptcy Means Test is gross income rather than net. That is, the amounts you enter must be the pre-tax and pre-deduction amounts. The US Congress did not want people to max out their tax withholdings and 401(k) deductions in order to worm their way into a Chapter 7 bankruptcy for which they may not really be eligible.
Failing to insert your full, gross, pre-deduction income amount is an easy mistake to make for non-lawyers.
Further, if you are self-employed and earn gross income individually or through an LLC or other corporate entity in that capacity, “gross” income also (initially) means entering your full business income prior to any business expense deduction.
Don’t worry: business expenses are not neglected by the Bankruptcy Means Test. They are entered separately.
Anyone who owns a business, however, whether in full or in part, should never attempt to file a bankruptcy without retaining an experienced Michigan bankruptcy attorney.
The Means Test is additionally complicated if your income is even partially derived from business ownership or self-employment. (Further, in Chapter 7, in particular, you simply risk losing the business if you DIY your bankruptcy!).
Means Test Mistake #3: My Babysitting Money Doesn’t Count as Income, Right?
So what exactly counts as “income” for Means Test purposes?
This is both an easy Means Test mistake to make and also an easy question to answer. Whether from a one-time or temporary source or from regularly received earnings, the following sources of funds you may have received in any given month do not usually “count” as income for Means Test purposes:
- Funds received from the sale of property (e.g., those comic books you sold on Ebay);
- Funds received as a loan from either a commercial or personal creditor;
- Funds received as a result of Social Security Income or Disability benefits;
- Funds received as a result of Veterans Disability benefits.
That’s it. Absolutely all other funds you have received within that 6-month pre-filing period of time swept into the Means Test are “income” for Means Test purposes.
Wait, does this include Michigan Unemployment Insurance Agency benefits??
Yes, it does. And it also includes the $35 you earned in cash from babysitting your friend’s kid that one night. It includes the cash income you earned from any odd jobs. It includes your cash tips from your waitressing job. It includes stock dividends. And more.
If you’re not sure whether some funds you received qualify as “income” for your Bankruptcy Means, consult your bankruptcy attorney.
Two further caveats as, surely, cartoon lightbulbs appear above some of your heads as you read the above bullets:
- Recharacterizing income as a “loan” will land you in hot water for Bankruptcy Fraud. (And you’ll also now need to list that “creditor” who “loaned” you the money as such elsewhere in your petition.)
- If you’re earning cash income “under the table” and not reporting it to the IRS or Michigan Treasury, this does not mean you get to leave it out of your Means Test. What it means is that you’re committing tax fraud and that filing for bankruptcy may let the cat out of the bag. Consult not only a bankruptcy attorney but also a tax attorney or halfway knowledgeable CPA about how to fix your prior non-disclosure before filing for bankruptcy.
Potential clients who ask too many questions about getting away with these sorts of things or “working the system” generally are not likely to find receptive bankruptcy lawyers to assist them.
Means Test Mistake #4: I Can Just Round My Childcare Deduction Up a Bit, Right?
If you are, initially, over the income median with regard to your gross Means Test income, this does not necessarily mean that you “fail” the Means Test.
What it means is that you or, better, your bankruptcy lawyer will now have to complete the second half of the Means Test. (If you are under-median, there is no “second half.”)
The second part of the Bankruptcy Means Test gives you the opportunity to deduct away some of that gross income for allowable household and other expenses in order that you arrive at something more closely resembling your take-home pay.
Warning: the result does not really mirror your take-home pay! There are many household expenses that you may feel obligated to pay each month in reality but which Congress did not agree are “allowable deductions” for Means Test purposes.
Your annual dues for your membership in the National Beagle Club of America? Forget about it.
Your kid’s private school or Catholic school tuition? Also forget about it. (Yes, you heard that right.)
However, child daycare or babysitting expenses? That’s an allowable deduction. The taxes you pay to the IRS and to Michigan Treasury? Those are allowable deductions, among many others.
Some of the Bankruptcy Means Test deductions are “flat” amounts simply based on your location and your household size. Your food and utility household deductions, for example, will be set amounts that have nothing to do with what you may or may not actually spend in reality on these things. (In many cases, this fact is favorable to you, unless you’re in the habit of never cooking and eating out every single night at fancy 5-star restaurants.)
Some of the Means Test deductions, on the other hand, are variable and are tied to what is actually deducted from your paychecks or what you actually spend.
The easy Means Test mistake to make is calculating these things incorrectly. This is, again, not an area where Google will help you. You need a real Michigan bankruptcy attorney to do a good job of this.
Bankruptcy is a Federal legal process—but it’s also very local. Often, whether or not you have calculated your Means Test tax deduction properly will be viewed very differently depending, for example, on which Chapter 13 Trustee is assigned to your case in the Detroit Bankruptcy Court venue.
You need a Detroit bankruptcy lawyer who knows each of the Chapter 13 Trustees’ arguments in advance, as well as those of the Eastern District of Michigan’s United States Trustee, who is the “gate-keeper” of Means Test integrity.
Means Test Mistake #5: What Safe Harbor Provisions?
The biggest Means Test mistake you can make is completing a Bankruptcy Means Test when you don’t have to.
Believe it or not, some people don’t.
For example, if you are a “business debtor” with 51% or more of your debt arising from “non-consumer” sources, you are not required to complete the Means Test. (It must still be filed with the appropriate “safe harbor” box checked.)
If you are a disabled Veteran, you may also not be required to compete a Means Test (if you were disabled under certain conditions and within a certain timeframe relative to your bankruptcy filing).
These “safe harbors” from the Bankruptcy Means Test should, again, be discussed with an experienced Michigan bankruptcy attorney.
Top 5 Bankruptcy Means Test Mistakes: The Bottom Line
The bottom line with regard the Bankruptcy Means Test is that you maybe can do a quality job of completing it on your own—but isn’t likely.
If you earn income in any form other than or in addition to straight hourly wage paycheck earning, you need an experienced Michigan bankruptcy attorney who knows the Means Test, the US Bankruptcy Code, Michigan Bankruptcy Court decisions on the subject, and even the various whims of the various Chapter 7, Chapter 13, and Assistant US Trustees.
Attorney Walter Metzen is a Board Certified Bankruptcy Expert who has successfully represented Michigan Chapter 7 and Chapter 13 clients for over 30 years.
If you are considering filing for bankruptcy, contact us now to schedule your free consultation.