One of the requirements of filing chapter 7 bankruptcy is to undergo a 'Means Test' and to submit a Current Monthly Income report to the bankruptcy court.
A means test is a three-step mathematical calculation done on income and expense worksheet that makes sure people are not abusing the bankruptcy system.
If a chapter 7 debtor qualifies at any step in the three-step calculation, then he/she is automatically eligible for chapter 7 bankruptcy protection, with other conditions applying.
The three-step calculation is: i) Step 1 - Median Income Test ii) Step 2 - Means Test Calculation iii) Step 3 - Multiply unsecured non-priority debt by 25% Step 1 - Median Income Test The first step of the chapter 7 process is to compare the current monthly income of the debtor to the 'state median income.
' The state median income is determined for each of the 52 US states by the US Census Bureau and this report is published every year.
Each individual's mean test is based on the state of residence and the number of dependents in the debtor's family.
This median income is then compared with the currently monthly income (CMI) of the debtor.
If the currently monthly income is less than the median state income, then the assumption of abusing the system invalidates itself and the debtor qualifies to file for chapter 7 protection.
So what factors are included in calculating Currently Monthly Income? CMI is calculated on the average monthly income received from all sources during the last 6 months prior to filing bankruptcy with the last calculation ending on the last day of the month before filing.
CMI incorporates the following incomes: * Business net income (after all expenses are paid for) * Interest, dividends and royalties * Pensions and retirement income * Gross wages (before taxes) including salaries, tips, bonuses, commissions and overtime.
* Unemployment benefit that is not a social security benefit * Rental and other property income * Child support receipts or spousal support Step 2 - Means Test Calculation If the chapter 7 debtor's current monthly income is larger than the state median income, then we must calculate Step 2.
The debtor's current monthly income is reduced by taking off some standard expenses as well as qualified personal expenses.
Here is a list of deductions that can be made from CMI: * Childcare support expenses including any court ordered spouse/child support payments * Average monthly federal, state, social security, self-employment or Medicare taxes * 401k Retirement contributions, work uniform costs and union payments * IRS local standard for mortgage or rent expense reduced by the amount of 60 months average versus actual mortgage expense * IRS local standard for housing and utilities expenses not including mortgage (see above).
* IRS national standard for food, clothing, household supplies, miscellaneous and other personal care expenses.
* Phone expenses incurred to maintain health and welfare of the debtor including cell phones, internet service, call waiting, voicemail, caller ID, long distance phone calls and more.
* Health insurance costs of the debtor not covered by a health savings account * Education costs required to keep current employment of debtor or for a physically/mentally dependent child.
* IRS Transport standard for ownership and lease expenses less 60 month average actual secured vehicle payment
A means test is a three-step mathematical calculation done on income and expense worksheet that makes sure people are not abusing the bankruptcy system.
If a chapter 7 debtor qualifies at any step in the three-step calculation, then he/she is automatically eligible for chapter 7 bankruptcy protection, with other conditions applying.
The three-step calculation is: i) Step 1 - Median Income Test ii) Step 2 - Means Test Calculation iii) Step 3 - Multiply unsecured non-priority debt by 25% Step 1 - Median Income Test The first step of the chapter 7 process is to compare the current monthly income of the debtor to the 'state median income.
' The state median income is determined for each of the 52 US states by the US Census Bureau and this report is published every year.
Each individual's mean test is based on the state of residence and the number of dependents in the debtor's family.
This median income is then compared with the currently monthly income (CMI) of the debtor.
If the currently monthly income is less than the median state income, then the assumption of abusing the system invalidates itself and the debtor qualifies to file for chapter 7 protection.
So what factors are included in calculating Currently Monthly Income? CMI is calculated on the average monthly income received from all sources during the last 6 months prior to filing bankruptcy with the last calculation ending on the last day of the month before filing.
CMI incorporates the following incomes: * Business net income (after all expenses are paid for) * Interest, dividends and royalties * Pensions and retirement income * Gross wages (before taxes) including salaries, tips, bonuses, commissions and overtime.
* Unemployment benefit that is not a social security benefit * Rental and other property income * Child support receipts or spousal support Step 2 - Means Test Calculation If the chapter 7 debtor's current monthly income is larger than the state median income, then we must calculate Step 2.
The debtor's current monthly income is reduced by taking off some standard expenses as well as qualified personal expenses.
Here is a list of deductions that can be made from CMI: * Childcare support expenses including any court ordered spouse/child support payments * Average monthly federal, state, social security, self-employment or Medicare taxes * 401k Retirement contributions, work uniform costs and union payments * IRS local standard for mortgage or rent expense reduced by the amount of 60 months average versus actual mortgage expense * IRS local standard for housing and utilities expenses not including mortgage (see above).
* IRS national standard for food, clothing, household supplies, miscellaneous and other personal care expenses.
* Phone expenses incurred to maintain health and welfare of the debtor including cell phones, internet service, call waiting, voicemail, caller ID, long distance phone calls and more.
* Health insurance costs of the debtor not covered by a health savings account * Education costs required to keep current employment of debtor or for a physically/mentally dependent child.
* IRS Transport standard for ownership and lease expenses less 60 month average actual secured vehicle payment
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