Challenges You May Face When Taking The Bankruptcy Means Test
The means test involves an analysis of your income and expenses to determine whether you can file for Chapter 7 bankruptcy. It is designed to prevent those with high incomes from having all their dischargeable debts wiped out since they are considered able to service at least some of their debts. There are lots of calculations that take place in the means test, and it's challenging for those who don't engage bankruptcy lawyers. Some of the potential challenges involve these three issues:
The court needs to compare your income to the median income for a household of the same size. Getting the household size wrong may make you fail the means test. Suppose your household size is six, but you make an error and state it as four; your income will be compared to the median income for a four-member household, which may put you at a disadvantage as far as the means test is concerned.
Making this mistake isn't as farfetched as it may seem because your household size isn't necessarily everybody living in your house. For example, it may be the exact number of people living in your house, those who live with you part time, or strictly those who are financially dependent on you; it all depends on your bankruptcy court's definition. Consult a bankruptcy lawyer conversant with your state's laws to help you avoid making this mistake.
Do you know that you can be disqualified due to a high monthly income even if you aren't employed? This can happen if you recently lost your job because your average monthly income is calculated for a six-month period. Therefore, you may be applying for bankruptcy after being out of work for two months and still be considered as having a high average monthly income. This is the kind of detail you may not know if you are processing your bankruptcy without an experienced legal advisor.
Mortgage Payment Deduction
If your income is higher than your state's median income for your household's size, then you are allowed to deduct certain expenses to help you qualify. Such expenses include childcare expenses, continuing charitable contributions, health insurance, and mortgage, among others.
The problem is that there are pre-determined amounts for mortgage payments based on IRS national and local standards. On one side, these predetermined amounts may be lower than the actual mortgage payments you make every month. On the other hand, your actual payments may be lower than the predetermined amounts if your loan is to be repaid in less than five years. This latter scenario is possible because your actual payments are calculated as the average monthly payments you will make over the next 60 months (five years). This means a shorter repayment period would effectively lower your monthly repayments because the IRS would use zero monthly payments between your last payment to the sixtieth month.
As you can see, it can get pretty confusing if you don't have the relevant (financial and legal) skills. Therefore, do yourself a favor and hire an experienced attorney (like those at Collins Toner & Rusen and similar firms) to help you with these issues from the beginning of your bankruptcy quest.