The Means Test - Expenses

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In 2006, Congress passed a group of reform measures to the bankruptcy system in an effort to encourage people to file for Chapter 13 where they must repay at least some of their debt, rather than filing Chapter 7, which obliterates their debt entirely.

One of those reforms, called the means test, calculates whether debtors (those filing for bankruptcy) have enough money left over each month after paying necessary expenses to allocate payments towards reducing their unsecured debt. The means test considers credit card balances, payday loans, signature loans, medical bills, unpaid utility bills, and even unpaid income taxes.

Your Income

The means test first examines your income in order to determine if you fall in the upper or lower half of earners in your state. If you fall in the lower half, you've automatically passed the means test. If you're in the upper half, the means test then examines your expenses to determine whether you pass. 

Your Expenses

Many expense deductions aren't actually based on money you spend, rather on figures the IRS considers to be normal expenditures for a family of your size living in your particular state. The IRS employs the same metrics it uses to determine the amount of money delinquent taxpayers can afford to pay in back taxes. These amounts may or may not reflect your personal situation. But in any case, the IRS factors in fixed amounts in the following three categories:

Personal

This category includes:

  • Food
  • Housekeeping supplies
  • Apparel & services (like dry cleaning)
  • Personal care products
  • Miscellaneous 
  • Out-of-pocket health care expenses (for under 65 and for over 65)

These are national standardized amounts based on which state you live in.

Housing

The standards for housing are broken down to state and county levels, and they include the following fixed amounts:

  • Mortgage or rent
  • Property taxes
  • Interest
  • Insurance
  • Maintenance and repairs
  • Utilities, including gas, electric, water, heating oil, garbage collection, telephone, cellphone, internet, and cable

Transportation

Vehicle costs are categorized either as ownership expenses (monthly loans or lease payments) or operating costs (maintenance, repairs, insurance, fuel, registrations, licenses, inspections, parking fees, and tolls). These amounts may differ by region, and if you own your vehicle outright only the operating cost would apply.

Other Necessary Expenses

For many types of expenses, the means test calculation lets you deduct the average of the actual amounts you expend for yourself and your dependents. These may include:

  • Taxes: federal, state and local, including income, self-employment Social Security and Medicare. This excludes real estate and sales taxes.
  • Employment: items required for your employment, like union dues, uniform costs, and mandatory retirement contributions.
  • Court-ordered payments like spousal or child support.
  • Life insurance
  • Education for employment or for a physically or mentally challenged child
  • Child care.
  • 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 percent of your gross monthly income.

Additional Reasonable and Necessary Expenses

The following expenses may be claimed if you can document that they're both reasonable and necessary:

  • Excess home energy costs.
  • Education expenses for dependent children under the age of 18. This does not include private school tuition.
  • Additional food and clothing expense.

Debt Payments

Payments on unsecured debts, like medical bills, credit cards, and payday loans do not qualify as expenses for the means test. However, the following debts may be deducted:

  • 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 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 may deduct a voluntary contribution to an ERISA retirement account, such as a 401(k), as well as payments you make on loans taken out from the retirement account.

Special Circumstances

If you think you present special circumstances that justify additional expenses for which there is no reasonable alternative, the means test form provides an opportunity to list those expenses. But you must provide explanations and documentation that supports 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.