Talking About Bankruptcy Services

Deductible Expenses That Can Help You Pass The Chapter 7 Means Test

11 May 2015 by Carlos Gomez

Filing for chapter 7 bankruptcy can help you deal with an overwhelming debt problem, but you must pass a means test to qualify for this type of case. The means test is designed to determine if you have enough disposable income to pay your debts. If you do, you won't be able to file for chapter 7 and will have to settle for chapter 13. However, the bankruptcy court does allow debtors to deduct a number of expenses from their incomes, which may make it easier to qualify for chapter 7 bankruptcy.

How the Means Test is Conducted

There are two ways the means test is done. The first way is to take the person's income over the prior six months, annualize it, and then compare that figure to the median income for the same-sized households in the state where the person lives.

For example, the median income in Michigan is currently $43,677 for a one-person household. Someone who made $3,000 per month in the previous six months would be eligible for a chapter 7 bankruptcy because the person's annual income would be calculated at $36,000 per year, which is less than the median for that state.

If the person's income lands above the median, then the court enacts the second option of deducting expenses from the amount and seeing what's left over. If there isn't any disposable income after the deductions, then the person will be allowed to file for chapter 7.

Deductible Expenses

Some of the expenses the courts use are standardized ones based on local and national standards, which is calculated by the IRS. However, you can still deduct certain expenses from leftover income that may reduce it enough so you pass the means test. These expenses include:

• Payments made to an Achieving a Better Life Experience (ABLE) account. This is a tax-free savings account people can use to put money aside to care for people with disabilities.
• Involuntary expenses such as union dues and required payments made to a retirement plan.
• Tax obligations, both current and arrearages related to non-dischargeable tax debt.
• Payments made to secured debts such as auto and house loans.
• Court ordered payments such as child support, alimony, and personal injury judgments.
• Health, disability, and life insurance premiums.
• Healthcare expenses. If the amount you pay is higher than the national standard, then you can typically deduct your actual expenses.
• Child care expenses including day care, preschool, and babysitting.
• Education expenses related to your employment or for a child who is mentally or physically disabled.
• Money spent caring for an elderly, disabled, or chronically ill person who lives in your household.
• Contributions to a charity. These contributions must have been made prior to filing for bankruptcy and are ones you expect to continue to make during the process. For example, a weekly donation to your church.
• Special expenses incurred related to your family's health and welfare. The court must approve these expenses, though, so be prepared to explain the situation.

Exceptions to the Means Test

Not everyone is required to pass the means test to qualify for a chapter 7 bankruptcy. There are three exceptions to the rule:

• Disabled veterans with a rating of at least 30 percent who accumulated their debts while they were on active duty.
• People whose debts consist of 50 percent or more of non-consumer debts such as business expenses or taxes.
• People who were in the National Guard or military reservists. They must have been on active duty when the debts were incurred or 540 days afterwards.

Passing the chapter 7 bankruptcy means test may be challenging if you have a high income and your expenses are high enough. There may be other options available for passing the test, and it's best to consult with a bankruptcy attorney, like Wiesner & Frackowiak, LC, for assistance.

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