When considering filing for bankruptcy, if a debtor earns over the median income for the state in which they live and the majority of debt at issue is consumer-related debt, a means test analysis typically must be performed. The means test is a two-part calculation that determines whether a debtor is eligible to determine if they are a candidate for Chapter 7 bankruptcy or whether they are restricted to filing for Chapter 13 bankruptcy. If the debtor is not eligible to file a Chapter 7 bankruptcy, the means test will calculate the debtor’s disposable income technically available to repay creditors in a Chapter 13 bankruptcy case. The means test is calculated pursuant to the requirements of the Bankruptcy Code.
The U.S. Trustee’s office is the governmental agency that oversees the administration of bankruptcy cases and is a division of the U.S. Department of Justice. They provide the figures used for the median income levels which determine if a means test is required. At the end of October 3023, the U.S. Trustee’s Office released the latest median income figures used in the means test calculations may be required in a Chapter 7 or Chapter 13 bankruptcy case. The new figures will be applied to bankruptcy cases filed after November 1, 2023. Below are the new and prior median income figures:
The New Figures for New York State (used for cases filed after November 1, 2023)
- Household of 1: $66,402
- Household of 2: $84,089
- Household of 3: $101,266
- Household of 4: $126,194
Add $9,900 for each individual in excess of 4.
Compare these with the prior figures used for earlier this year.
The Prior Figures for New York State (used for cases filed after May 15, 2023)
- Household of 1: $68,814
- Household of 2: $84,958
- Household of 3: $103,444
- Household of 4: $126,167
We (and many other bankruptcy lawyers) found it surprising that the new means test figures decreased from the prior numbers. This is especially the case, given that the unemployment rate in New York is 4.0% or even slightly less. That is even lower than the pre-Pandemic unemployment rate. Furthermore, wage growth is up compared with pre-Pandemic levels. Current wage growth in New York is 2.2% versus the pre-Pandemic level of 1.5%. Nationally, unions have also been negotiating improved wage benefits as of late. Even a small change in the figures can mean the difference between a quick discharge of debt through Chapter 7 bankruptcy and being required to pay back at least some outstanding debt through a Chapter 13 payment plan.
The means test calculates gross annual income based on the previous six months of income for a debtor’s household, with exclusions for Social Security and funds received for VA and DoD retirement or disability benefits of the debtor. The projected annual gross income is then measured against the median income for the household size and state in which the debtor resides. If the debtor’s household income is less than the applicable median household income figure, the means test does not apply, and the debtor may qualify for Chapter 7 bankruptcy protection. If the debtor’s household income is more than the applicable median household income figure, the debtor must complete the second half of the means test to determine if they have the “means” to afford a Chapter 13 bankruptcy plan payment in which the filer is required to pay at least a percentage of their debt back. When a debtor’s household income is above the median monthly level, and they still have a certain amount of disposable income after completing the means test calculations, which primarily use IRS local standards instead of the debtor’s actual expenses, they are deemed to have failed the means test.
Nevertheless, depending on a debtor’s financial situation, they may want to wait to qualify for Chapter 7 bankruptcy if it is a possibility. Some debtors have jobs that are seasonal or with income that could fluctuate during the year. Since the means test has a six month look back period, it is important to keep that in mind when evaluating when and if to file bankruptcy. In addition, if a debtor loses a job or income source, the average of their last six months of income will go down with each month they wait and they may eventually qualify for Chapter 7 bankruptcy. All these additional factors are important to consider when navigating the means test.
The inability to qualify for Chapter 7 bankruptcy does not leave a debtor without options. If a debtor fails the means test and they are not likely to pass it in the near future, they may want to file for Chapter 13 instead. This version of bankruptcy restructures one’s debts into a 60-month payment plan which is interest-free on most debts. The debtor makes payments to a bankruptcy trustee, who in turn pays the creditors that file claims with the Bankruptcy Court. Only those creditors that properly file a timely claim will get paid in the plan. In addition, depending upon the means test results and budget, a debtor may only have to pay a percentage of the debt back and the balance gets discharged similar to a Chapter 7 bankruptcy case. We have been seeing a noticeable increase in Chapter 13 filings for debtors that do not qualify for Chapter 7 bankruptcy, and only real debt issues are with unsecured debt such as credit card debt, personal loans, and taxes. The fact is that Chapter 13 bankruptcy is a much better alternative to risky debt settlement programs.
Contact the Law Offices of David I. Pankin, P.C.
If you are struggling with debt, it is important to speak with an experienced bankruptcy lawyer. At the Law Offices of David I. Pankin, P.C., we have over 25 years of experience helping debtors achieve a fresh financial start and have been handling means test cases since its inception. To schedule a free consultation, either in person or remotely, please contact our office at (888) 529-9600 or use our easy online contact form.
