The Means Test - Expenses
In 2006, Congress passed a package of reforms to the bankruptcy system. Despite the fact that there was very little evidence that people were taking advantage of the system or trying to defraud their creditors, Congress intended that many of the reforms would discourage people from filing or, if they did file, encourage them to forgo a Chapter 7 (to wipe out their debt) in favor of a Chapter 13 case to repay at least some of their debt.
One of those reforms is called the means test. It is a calculation to determine whether debtors (those who file a bankruptcy case) have enough money left over each month to make a meaningful payment toward reducing their unsecured debt. Unsecured debt has no collateral. It includes credit card balances, payday loans, signature loans, medical bills, unpaid utility bills and the like. It can even include unpaid income (or other) taxes.
In other articles in this series, we've discussed the what the means test is designed to do, how it works, what the "presumption of abuse" is, and what types of income are included or excluded from the calculation.
Projected Disposable Income
What does it mean to be able to "afford" to make payments on your own or through a Chapter 13 repayment plan? The means test is designed to come up with a number, called "projected disposable income," that is supposed to represent an amount of extra money you have left over each month, taking into account your income and your reasonable and necessary expenses.
I know what you're thinking. "I don't have anything left over. I'm in the hole at the end of the month. That's why my credit cards are maxed out." Well, the means test looks at your income and your expenses in a way that may be different from the way you would look at them. It applies a lot of arbitrary rules and numbers, some based on national or regional averages, that may have no basis in the reality of your life.
First, Your Income
The means test first looks at your income to determine if you fall in the upper half of earners or the lower half of earners in your state, money-wise. If you fall in the lower half, you've automatically passed the means test. If you're in the upper half, the means test also looks at your expenses to determine whether you pass or not. In this article, we concentrate on how those expenses are treated.
Next, Your Expenses
Many of the expense deductions are based not on what you actually spend each month, but what the IRS considers to be a normal amount for a family the size of yours living where you live. Yes, I said the IRS - the same folks who collect your taxes. When the IRS is collecting back taxes, it uses a formula to determine what taxpayers can afford to pay back and how often. When Congress passed the overhaul of the bankruptcy laws that included the means test, they decided not to re-invent the wheel, but instead required that the means test draw on the tables developed by the IRS. These amounts may or may not reflect your personal situation.
These fixed amounts can be found on the website that the US Trustee maintains on means testing and fall into three broad categories we will call personal, housing and transportation.
This category includes:
- Housekeeping supplies
- Apparel & services (like dry cleaning)
- Personal care products
- Out-of-pocket health care expenses (for under 65 and for over 65)
These amounts are considered national standards and apply regardless of your location.
The standards for housing have been broken down to the state and county level. These include fixed amounts for
- Mortgage or rent
- Property taxes
- Maintenance and repairs
- Utilities, including gas, electric, water, heating oil, garbage collection, telephone, cell phone, internet and cable
If you have a vehicle, the expenses for your vehicle come in two parts. One is the ownership expense, (which covers a monthly loan or lease payment) and the operating cost (maintenance, repairs, insurance, fuel, registrations, license, inspections, parking and tolls).
These amounts are broken down by region.
If you have a car, but no payment, you can usually only apply the allowed expense for the operating cost.
If your car payment is less than the standard, you will only be able to take the amount of the car payment as your ownership cost.
If you are a single filer, you only get credit for one car. If you are filing jointly with your spouse, you only get credit for two cars, even if you have dependents who need cars of their own.
Other Necessary Expenses
For many types of expenses, the means test calculation allows you to deduct the average of the actual amounts you expend for yourself and your dependents. Many are set out in the form itself:
- Taxes: federal, state and local, including income, self-employment Social Security and Medicare, but not real estate and sales taxes
- Employment: items required for your employment, like union dues and uniform costs, and mandatory retirement contributions (not voluntary retirement contributions)
- Court-ordered payments: for example spousal or child support payments, unless they are past due
- Life insurance
- Education for employment or for a physically or mentally challenged child
- Health care costs, in excess of the fixed amounts allowed above, that are not reimbursed by insurance or paid out of a health savings account
- Telecommunication services: other than basic home telephone and cell phone service - included in housing costs above - to the extent necessary for your health and welfare or that of your dependents.
- Health insurance, disability insurance and health savings account expenses
- Continued contributions to the care of household or family members who are elderly, chronically ill, or disabled
- Protection against family violence under the Family Violence Prevention and Services Act or other applicable federal law
- Charitable contributions not to exceed 15% of your gross monthly income
Additional Reasonable and Necessary Expenses
The following expenses can be claimed, if you can demonstrate, usually with documentation, that the expenses are reasonable and necessary;
- Excess home energy costs
- Education expenses for dependent children under 18 (but not private school tuition)..
- Additional food and clothing expense: If your food and clothing expense exceeds the standard amount deducted above, you can claim an additional 5%
Payments on unsecured debts, like medical bills, credit cards and payday loans are not allowed as expenses for the means test. The following debts can be deducted as an expense
- Payments on secured claims, including loans for the purchase of real property, automobiles and other personal property.
- Payments on "priority claims," like income taxes, child support and alimony payments.
- Administrative expenses: the means test calculation also deducts an amount that estimates what your projected average monthly Chapter 13 payment would be, along with the fee that the Chapter 13 trustee would charge for administering the case.
Qualified Retirement Deductions
In the case of a Chapter 13 means test only, you can deduct a voluntary contribution to an ERISA retirement account, like a 401(k), as well as payments you make on loans taken out from the retirement account.
If you believe that you present special circumstances that justify additional expenses for which there is no reasonable alternative, the means test form gives you an opportunity to list those expenses and to explain why you believe those expenses should be counted in your case. You must be prepared to provide documentation to support your claim.
To learn more about the types of situations that can give rise to special circumstances, visit The Means Test - Overcoming the Presumption of Abuse.
Updated December 2017 by Carron Nicks.