The Bankruptcy Means Test

The means test is the gatekeeper for Chapter 7 bankruptcy. Enacted as part of BAPCPA in 2005, it is designed to identify above-median-income debtors who could repay a meaningful portion of their debt out of disposable income and channel them into Chapter 13. Below-median-income debtors pass automatically. Most of our individual Chapter 7 clients clear the test without issue, but the calculation is rigid and unforgiving, so the planning matters.

Step One - The Median Income Test

The first step compares the debtor's "current monthly income" (CMI) — the average gross income for the six full calendar months ending the month before filing, annualized — to the New York median income for a household of the debtor's size. The U.S. Trustee publishes new figures periodically. Recent New York median income figures (subject to update):

• 1-person household: approximately $74,000
• 2-person household: approximately $96,000
• 3-person household: approximately $114,000
• 4-person household: approximately $137,000
• Additional household members: roughly $9,900 each

The figures change every six to twelve months. We use the live Census Bureau / U.S. Trustee numbers in effect on the petition date.

If your CMI is at or below the New York median for your household size, the means test is satisfied and you can file Chapter 7. No second-step calculation is required.

What Counts as "Current Monthly Income"

CMI is broader than ordinary "income" in everyday usage. It includes:

• Wages, salaries, and tips.
• Self-employment net income.
• Rental and investment income.
• Pension, annuity, and retirement distributions.
• Unemployment compensation (in most circuits).
• Regular financial contributions from non-debtor household members.
• Alimony and spousal support received.

CMI does not include Social Security benefits (which are excluded by the statutory definition) or, in most circuits, income tax refunds and one-time benefits. The treatment of recently-changed income streams can be planning-sensitive — an income reduction that becomes effective in month 6 of the look-back can change the calculation completely.

Step Two - The Disposable Income Calculation

If CMI exceeds the median, the analysis moves to a second-step calculation that subtracts allowed deductions from CMI to arrive at "monthly disposable income." If monthly disposable income is below the statutory threshold, the filer still qualifies for Chapter 7 under a presumption of no abuse. If it exceeds the threshold, Chapter 7 is presumptively abusive and the U.S. Trustee can move to dismiss.

Allowed deductions fall into three categories:

• IRS National Standards. Standardized amounts for food, clothing, housekeeping supplies, personal care, and miscellaneous, based on household size.
• IRS Local Standards. Region-specific amounts for housing, utilities, and transportation. New York City has its own Local Standards, which are among the highest in the country.
• Actual expenses for specified categories: taxes, mandatory payroll deductions, life insurance, court-ordered payments, child care, health insurance and out-of-pocket health care, telecommunications, and others.

The means test also allows deductions for secured-debt payments (mortgage, car loan) and priority-debt payments, which is what enables many above-median New York debtors with a home and a financed car to clear the test.

Common Means Test Pitfalls

• Wrong household size. Household includes dependents living in the home, including children, parents, and others. We count carefully.
• Timing of income spikes. A bonus or commission paid during the six-month look-back distorts CMI. Sometimes the right move is to wait one or two months until the bonus rolls out of the calculation.
• Joint filers. Married couples can file jointly or individually. Sometimes individual filing protects against a spouse's high income. The "marital adjustment" deduction sometimes solves the same problem in a joint case.
• Self-employment. CMI for self-employment is calculated as gross receipts minus ordinary and necessary business expenses, not gross receipts alone.
• Excluded income. Social Security benefits are excluded entirely. So is income from sources protected from inclusion by case law in the controlling circuit.

Above-Median Debtors Who Fail the Means Test

Failing the means test does not mean bankruptcy is unavailable — it just means Chapter 7 is unavailable in the standard case. Above-median debtors can still file Chapter 13 and obtain a discharge after completing a five-year plan, with the disposable income computed under the same standards.

Section 707(b)(3) and Totality of the Circumstances

Even debtors who pass the means test face a residual section 707(b)(3) "totality of the circumstances" challenge: the U.S. Trustee or a creditor can argue that, notwithstanding the means test result, the case is abusive based on the debtor's overall financial situation. These motions are rare in consumer cases but do come up when the debtor's actual budget shows large discretionary spending or when there has been pre-filing financial mismanagement.

The Statutory Disposable Income Threshold

The second-step calculation produces a number called "monthly disposable income." Multiplied by sixty (the assumed plan length), that yields the total amount a debtor could theoretically pay creditors over a five-year Chapter 13. Section 707(b)(2)(A)(i) compares this total to two benchmark figures:

• $9,075 over 60 months — or roughly $151 per month. A debtor whose disposable income falls below this lower threshold passes Step Two automatically.
• $15,150 over 60 months — or roughly $253 per month. A debtor whose disposable income falls between the two thresholds passes only if monthly disposable income, multiplied by sixty, is less than 25 percent of the debtor's nonpriority unsecured debt.

Filers whose disposable income exceeds the upper threshold are presumptively abusive, and the U.S. Trustee will almost always move to dismiss or convert the case absent special circumstances. These dollar amounts are statutorily adjusted every three years on April 1.

Special Circumstances Rebuttal

Even a presumption of abuse can be rebutted by showing "special circumstances" under section 707(b)(2)(B). The statute gives two illustrative examples — a serious medical condition and an active-duty military call-up — but the doctrine extends to any documented circumstance that justifies a downward adjustment to CMI or an upward adjustment to allowable expenses. Examples we have litigated successfully in similar fact patterns:

• Substantial ongoing medical expenses for a non-debtor dependent.
• Commuting costs materially in excess of the IRS Local Standard transportation allowance.
• Court-ordered support obligations that the IRS Local Standards do not capture.
• Reduction in income that has occurred during the six-month look-back but is not yet fully reflected in CMI.

Special circumstances must be documented contemporaneously and explained in the petition. The burden is on the debtor.

The Disabled Veterans Exception

Section 707(b)(2)(D) exempts a class of disabled veteran debtors from the means test entirely. To qualify, the debtor must be a disabled veteran whose indebtedness was incurred primarily during a period of active duty or while performing a homeland defense activity. The exemption is narrow but valuable for the veterans who qualify.

The Means Test Forms

The calculation is captured on a series of Official Bankruptcy Forms:

• Form 122A-1 (Chapter 7 Statement of Current Monthly Income). The Step One CMI calculation and median comparison.
• Form 122A-2 (Chapter 7 Means Test Calculation). The Step Two disposable income calculation, required if Form 122A-1 indicates above-median income.
• Form 122A-1Supp. Used to claim the disabled veterans exemption or other statutory exclusions.
• Form 122C-1 and 122C-2 (Chapter 13). The Chapter 13 analog, used to determine plan length and projected disposable income for above-median Chapter 13 filers.

The forms cross-reference each other, and a small error in CMI on the first form propagates through the rest of the calculation. We prepare the forms in tandem with the rest of the petition and verify the math against the source documents before filing.

To run the means test calculation on your situation, call 212-233-1233 for a free consultation. The analysis takes about fifteen minutes if you have your last six months of pay stubs handy.