Many of the potential Indiana bankruptcy clients who come in to meet with me at Halcomb Singler, LLP, have done their internet research. In fact, a reason that I spend a significant amount of time on this blog is that a lot of my clients call me after reading through several of my blog postings. People who are struggling with financial difficulties understandably turn to the internet for answers. One thing that just about every potential client seems to know about bankruptcy when they come to my office is whether they are above or below the average income for their household size according to the bankruptcy means test.
Knowing whether your last 6 months income puts you above or below the average income for your household size according to the means test is a great start, but it is only scratching the surface. First, let me give a general explanation of the means test. This test came about in 2005 as a method of determining whether bankruptcy debtors SHOULD have any money left at the end of the month to pay creditors. The means test is similar to a tax return in that you begin with your “current monthly income,” which is the amount of money you made over the past 6 months (for your entire household) divided by 6. From your current monthly income various deductions are taken such as an average mortgage/rent expense, food expense, utility expense, etc. In addition, you may deduct a few expenses that are what you actually spend on a monthly basis instead of an average for your household size such as term life insurance for the debtor(s), church/charitable contributions (there is a maximum deduction for such contributions), health insurance, health savings account, etc. When you get to the end of the means test you will be left with the amount of money the means test says you should have left at the end of every month. This number will determine whether you will need to file a Chapter 7 or Chapter 13 bankruptcy and if it is a Chapter 13 your remaining funds according to the means test are normally required to be paid to unsecured creditors such as credit cards during the life of the Chapter 13 plan.
Whether you are above or below the average income for your household size is significant, but it not the entire story. If this initial calculation shows that you are below the average income for your household size then you have made a big step toward qualifying for a Chapter 7. In addition, if you are filing a Chapter 13 it means that your repayment term can be as short as 36 months and that your payment will be based on your actual income minus actual reasonable living expenses instead of what the means test says you should have left at the end of the month after paying your expenses.
What is important to note is if your household income is above the average for your household size then there is a presumption that you will not qualify for a Chapter 7 bankruptcy. Presumption is the important word here. It does not means that after you go through the entire means test that you will not be able to rebut the presumption of abuse and qualify for a Chapter 7 bankruptcy nonetheless. For example, if you have a significant income tax liability, larger than average house payment, 2 vehicle payments, and are paying a significant amount for health insurance coverage you are more likely to rebut the presumption of abuse than a household with two 5 year-old vehicles that are paid off and a modest house payment.
But how could that be? How could a person who has 2 vehicles that are paid off and has a smaller house payment be less likely to rebut the presumption of abuse? Wouldn’t it seem that the person with more secured debt and tax liabilities is more “abusive?” The truth is that the means test calculation is attempting to calculate how much money you should have left over to pay creditors after paying your living expenses. So, it follows that if you have higher payments then you may have less money at the end of the month to pay to creditors. As counter-intuitive as it may seem, those with more secured debts have a better chance of rebutting the presumption of abuse and qualifying for a Chapter 7 bankruptcy than those with little or no secured debt. Does this sound fair to you? Well, it’s not.
If you are considering bankruptcy I can make sure that you are taking all of the deductions permitted under the law. I have assisted many clients who make more than the average monthly income for their household size obtain a Chapter 7 discharge in bankruptcy. If you live in the Indianapolis area just give me a call to set up your initial consultation at no charge. I would be happy to meet with you to either help establish a plan to avoid bankruptcy, to answer questions you have about bankruptcy and to offer my opinion as to whether or not bankruptcy may be of assistance to you financially. Just call Halcomb Singler, LLP, at (317) 575-8222 or click here.
Halcomb Singler, LLP, is a debt relief agency. It helps people file for bankruptcy under the bankruptcy code. No attorney-client relationship with the firm of Halcomb Singler, LLP, is created through this blog. Also, please note that Erika Singler is an attorney licensed in Indiana and does not seek to practice law in any jurisdiction in which they are not properly authorized to do so. The information contained in this blog is general in nature and should not be relied upon for the circumstances of any individual(s) or businesses.