The Social Security Means Test in Bankruptcy Proceedings

The Social Security Means Test in Bankruptcy Proceedings

The Means Test

The means test is a device used in bankruptcy proceedings to limit the filing of Chapter 7 bankruptcy and to influence how lenders are repaid in Chapter 13 bankruptcy. Simply put, the means test works by determining whether or not your disposable income is above the median disposable income in your state.

If your income is above the median, you are likely ineligible for Chapter 7 bankruptcy but can still file Chapter 13. If it’s below, you may be eligible for both Chapter 7 and Chapter 13.

However, even if your disposable income is above the median, you may still be able to file Chapter 7 bankruptcy.

Once the initial calculation for disposable income is completed a second phase of the means test examines monthly obligations that may lower disposable income. These other obligations include secured debt, payments on non-dischargeable tax debt, ongoing medical debt and even cash donations to charities (most often church tithing) if they are supported by historical documentation. If these obligations lower disposable income enough, you may be able to file for Chapter 7 bankruptcy.

Exceptions to the Means Test

There are three broad exceptions where a debtor doesn’t have to pass the means test in order to file for Chapter 7 bankruptcy.

  1. The first is if someone’s debts are comprised of at least 51% non-consumer debt. Most often this is business debt, including credit cards used to pay business expenses and any debt taken with a hope to gain a profit.  Other debts can also constitute non-consumer debts, such as leases on property and vehicles that were used primarily for the business.  Generally the debt must be primarily business debt to exempt the individual from the means test.

  2. The second exception is for disabled veterans, who don’t have to pass the means test as long as they are at least 30% disabled and primarily incurred their debt while deployed.

  3. The third exception is for military reservists and members of the national guard, who don’t have to pass the means test while they are on active duty and up to 540 days after deployment as long as they were on active duty for at least 90 days.

Calculating Income for the Means Test and Social Security

Social security benefits do not count towards disposable income during a means test for bankruptcy.

Income is calculated by looking at income over the six months prior to filing for bankruptcy, including wages, overtime, alimony, child support and unemployment compensation. Income in that period is averaged to get a current monthly income.

Certain expenses, such as mortgages, are deducted from the current monthly income, which leaves the disposable monthly income. The disposable monthly income is the number used for bankruptcy proceedings. Social Security benefits are one of the few exempted forms of income in bankruptcy proceedings.

Chapter 7 Bankruptcy

Chapter 7 bankruptcy is designed to help those who truly can’t pay their unsecured creditors. If someone’s disposable income is above the median the law presumes that they have the ability to pay some of their unsecured debt, which is why they are ineligible for filing Chapter 7 bankruptcy. However, because Social Security is exempted from calculating disposable income, it isn’t factored into the means test for bankruptcy.

For example, if a person makes $50,000 in disposable income and receives $10,000 in social security and the median disposable income in their state is $55,000, they would fall below the median and would be able to file Chapter 7 bankruptcy.

Chapter 13 Bankruptcy

If someone falls above the median via the means test they are ineligible for Chapter 7 bankruptcy but could still file for Chapter 13 bankruptcy. Under Chapter 13 bankruptcy, if the debtor’s disposable income is above the median, they are required to file a 60 month repayment plan, unless they can pay off all debts, including unsecured debts, in less than 60 months.

Even if a debtor’s disposable income falls below the median and they are eligible for Chapter 7 bankruptcy, they still could file for Chapter 13 bankruptcy, and voluntarily “donate” some of their social security payments to take advantage of some of the benefits of Chapter 13.   Alternatively, because Chapter 13 usually requires the contribution of all disposable income over a five-year period, it also requires living on a tight budget.  However, if someone who is collecting social security files Chapter 13, he will have more disposable income, in reality, because the social security is not counted as income.  That makes Chapter 13 much more comfortable for those collecting social security than those that are not in many instances.  However, determining the best way to proceed in bankruptcy is a very case specific task and should be handled by a professional.

The Means Test in Chapter 7 vs. the Means Test in Chapter 13

While disposable income for the means test is calculated the same under chapter 7 and 13 the test itself is used quite differently. In Chapter 7 the means test is a barrier used to prevent ineligible debtors from filing for Chapter 7 bankruptcy. In Chapter 13 proceedings the means test is used to calculate repayment plans.  Social Security is not included in disposable income calculations under either means test.

Albuquerque Business Law and Bankruptcy Proceeding

The attorneys at Albuquerque Business Law are bankruptcy experts that can help you through the entire process. They can assist you in determining what and when to file and ensure that you’re on the right track. Whether it’s deciding what type of bankruptcy to file or it’s correctly calculating your disposable income, our attorneys can guide you through the process and help you get back on track.

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