Means Test

An experienced Denver bankruptcy lawyer, David M. Serafin will advise you as to whether you pass the Means Test in Colorado and, if you do, which chapter of consumer bankruptcy is optimal.

As per the new laws enacted in 2005 under the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), Congress made it much more difficult to qualify for chapter 7 by requiring debtors in Colorado to pass the Means Test. As a result of BAPCPA, more Colorado debtors are pushed into chapter 13 which requires a debt repayment plan of up to 5 years. Congress’ theory was that debtors with disposable income should be required to pay back some or all of their unsecured debts., regardless of their actual financial situation.

The Means Test looks at your monthly income and allowed expenses, as compared to the number of household members and state/county of residence for the six full months prior to the bankruptcy filing date. (For instance, the Means Test would look back to income/expenses from July 1, 2010 to January 1, 2010 for a January 15, 2011 filing.) The U.S. Trustee calculates the Median Family Income for a family of a given size in Colorado. You will pass the Means Test if your monthly income (averaged over the six month look back period) is less than the Median Family Income on the date of filing.

But, if your monthly income exceeds the Median Family Income in Colorado, it will be necessary to deduct allowed expenses, such as mortgage or car payment, payroll deductions (such as taxes, health insurance, life insurance, child care, or certain retirement contributions/loans), or out-of-pocket medical/dental expenses. If your allowed expenses are high enough, you will pass the Means Test. Conversely, any chapter 7 filed whereby the debtor fails the Means Test will likely be objected to by the U.S. Trustee as giving rise to a Presumption of Abuse (justifying dismissal of the case).

Should your income exceed the Median Family Income in Colorado, this same Means Test formula will determine the duration and amount of your chapter 13 monthly payment plan and the amount of disposable income to be paid to unsecured creditors. One problem with the disposable income calculation is that the Means Test does not use your actual living expenses. Rather, the Bankruptcy Code and U.S. Trustee have implemented IRS national and local allowances to determine average living expenses for housing, food, and operating and ownership expenses for a vehicle. (A bankruptcy debtor’s actual living expenses almost always exceed the IRS allowances provided by the Bankruptcy Code.)

There’s more bad news: the Means Test also looks at the income and expenses of a spouse who does not file for bankruptcy. Even if the debtor ordinarily would pass the Means Test, a non-filing spouse’s income may force the debtor into chapter 13, unless the spouses make a declaration of separate households if living apart.

Please note that there are circumstances where a below Median Family Income debtor in Colorado, who passes the Means Test, would prefer to file for chapter 13. The debtor may need to block a foreclosure sale and gradually cure mortgage arrears, strip off a second mortgage lien (if the home’s value is upside down with regard to the first mortgage alone), own non-exempt equity in a home or business otherwise subject to liquidation by a chapter 7 trustee, or have priority tax debt owed to the IRS or Colorado Department of Revenue to be paid back through the chapter 13 plan without the further accrual of interest and penalties. Other below Median Family Income debtors may need to file for chapter 13 due to being ineligible for chapter 7 because of a previous chapter 7 filing within the past eight years.

On countless occasions, we’ve witnessed debtors unrepresented by a lawyer file to save money only to have their case dismissed for failure to comply with the rather technical Means Test rules. An experienced Denver bankruptcy lawyer who has successfully defended every Statement of Presumed Abuse filed by the U.S. Trustee in Colorado Bankruptcy Court (objecting to chapter 7 bankruptcy eligibility), David M. Serafin will help navigate you through the Means Test in Colorado in order to eliminate your debt and get the fresh start you deserve.