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How To Beat The Means Test And Avoid Chapter 13 Bankruptcy

Bankruptcy law requires almost every debtor1 to run his or her gross household income through the “means test” to compare it to other similar size households in the same state.  Debtors whose household income exceeds the median (as established by the Census Bureau) must file under Chapter 13 (or face a motion to convert or dismiss the case), unless their allowed expenses (payroll deductions, secured debt payments, and living expenses as allowed under IRS rules), leaves them essentially no income to pay creditors.  Filing under Chapter 13 means making burdensome monthly payments for five years.

If a debtor in Chapter 13 becomes unemployed, or his expenses increase, or wages fall, at any time during the five year plan period, the case will likely be dismissed without any discharge of debt.  The debtor is entitled to ask the court to modify the plan in such a case.  But the modification is not guaranteed; the debtor’s lawyer may not want to spend time and money to seek modification, and creditors may object.

There are times when Chapter 13 is a good choice for a debtor.  If you need time to pay off a mortgage deficiency, Chapter 13 is uniquely helpful.  But for most people, Chapter 7 is usually a better choice because it can be done and over in three months.

What can debtors do avoid appearing to be “above means” and therefore forced into Chapter 13 (if they can’t qualify as disabled vets or business debtors)?

First, most debtors are not above the median.  By definition, median is the point where half the population are above the mark, and half are below it.  Of those who are debtors, most will be below median, because, surprise, most people who file bankruptcy do so because they in fact have less money.  (Of course, there are those who simply overspend on a large income, but they are not the majority).  The odds are with you; just fill out the forms and see.

For those who have income in excess of the median, there are several options.  One step that will instantly improve your position is to add non-earning members to your household.  The rule generally applied to determine household size for the means test is “heads on beds.”  Bring your kids home.  Even a non-dependant can be part of the household if you pay the rent and buy the groceries.

Because the income analysis looks back six months, most other options will require advance planning.  First, cut out your overtime and second job.  The money you give up now will have benefits in lower costs for the future five years.  You might even accept an unpaid leave of absence if you can afford it and can be sure your job will be there for you.

If you have rental income, or business income, check that your expenses are fully stated, so the net income is not overstated.  If you are including the income of any other household member (including your spouse in a non-joint filing) you must be sure to deduct all their individual expenses from their income, including everything they spend that is not spent on household expenses.

Next, consider what you can do to increase your secured debt payments (keeping in mind that the law will average the payback over 60 months, so an early payoff will do you no good).  Your bankruptcy counsel cannot advise you to take on new debt prior to filing bankruptcy (and you might not be able to find a lender anyway, if you’re at the bankruptcy stage).  But one big factor in the means test is the repayment of secured debt, so having a larger loan on a new car is better in the calculation than having a small car loan, or none at all.  If your car is an older car that is fully paid-off, you may want to buy a newer model that will be sure to last the plan period.

Then check your charitable contribution amount.  Congress was careful to ensure that even bankruptcy candidate should not be discouraged from making their tithes.

The allowance for “telecommunications expense,” as stated in the current Form 22, purports to disallow regular home phone and cell phone cost, but allows a deduction for the cost of long distance, caller ID, call waiting, pagers, and internet service.  It might be difficult for the trustee (or you) to disentangle your cell phone bill to the extent proposed.

You can deduct your child’s private school expense up to $147.50 per month, provided he is under 18 and not in college.

Your payment on back taxes and child support (as well as current support) is deductible.

Finally, you can add expenses for “special circumstances.”  These should be actual expenses you incur, not otherwise addressed in Form 22, that are reasonably necessary for your or your family’s maintenance.  Be ready to support your claim with actual receipts.  You may have to argue these with the U.S. Trustee’s attorney.


1 Narrowly drawn exceptions apply for disabled veterans, and certain reservists called up after Sept. 11, 2001 who incurred their debt during their military service. Also, debtors whose debt is not more than half consumer debt are exempt, but a mortgage is considered consumer debt.

At the Law Offices of H. Frank Cahill, in Anchorage, we represent clients throughout Alaska, including, Wasilla, Dillingham, Palmer, Valley, Kenai, Fairbanks, Kodiak, Seward, Soldotna, Homer, Juneau, Wrangell, Petersburg, Bethel, Nome and Sitka; in Fairbanks-Northstar Borough, North Slope Borough, Northwest Arctic Borough and Bristol Bay Borough; and across the Kenai Peninsula. 

We are a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code.