Seven Common Means Test Mistakes

Hiring A Bankruptcy Attorney Can Prevent These Common Means Test Mistakes

The starting point in filing bankruptcy is the Means Test as it determines whether you qualify to file a Chapter 7 bankruptcy and it influences the length of your Chapter 13 bankruptcy plan. However, the test involves a complicated process and mistakes are made. Below are some of the most common mistakes that are made with respect to the Means Test. These mistakes can be avoided by hiring a bankruptcy attorney. 

1.Using the wrong household size.

 Working out the right household size may be problematic. To make matters worse, the courts tend to disagree on this. While some courts maintain the view that you count everyone who is living in your house, often known as the “heads on beds” approach, other courts have included only those occupants who are dependent on the debtor.

The impact of your household size in the application of the Means Test is vital because it is used to work out:

  • The median family income for comparison to yours, and
  • the standard deduction amounts for housing and certain expenses.

A great rule of thumb is to think about whether the occupants are in some way financially interdependent of each other and form one economic unit. For example, a tenant who rents a room in your house, but pays only rent and does not contribute towards other expenses nor does he or she share family resources, would usually not be regarded and counted as a member of your household. Hiring a bankruptcy attorney will ensure that your household size information is correct. 

  1. Your income does not correlate with your documentation.

     The income that you list on the Means Test form must be the same on your documentation. This is because the number of weeks in a month, the date on which your paychecks are issued, or the timing of your bankruptcy filing will affect you “average” income amounts sufficiently to determine whether or not you qualify to file for Chapter 7 or if you file for Chapter 13 whether you need to make payments over 3 or 5 years. Hiring a bankruptcy attorney to review your income documents can avoid this error. 

  1. Incorrect child support information.

    You list child support on the forms which you are suppose to receive, but you do not actually receive it, and vice versa- child support is considered income only if you are receiving it. You should not list child support if you are not receiving it and you also cannot list child support as an expense if you are not paying it.

  1. Actual Mortgage payments and standard housing deduction.

    Usually, you list the standard housing deduction and then adjust it on a different line to claim the actual amount of your mortgage payments. You may only take the standard housing deduction if you do not intend to keep your house and are surrendering it to the mortgage holder. You cannot alter these amounts to match the mortgage payments that you will no longer make.

  1. Taking deductions that are not permissible.

    Some expenses that are not deductible are 401K, retirement account contributions, 401K loan repayments and college expenses (however education expenses as a condition of your employment would be deductible). Cell phones are not separate from the standard utility deduction and are included therein.

  1. Not taking permissible deductions.

    Ensure that you take all permissible deductions. Some allowable deductions include payments you make under court order, like as in a divorce or custody case, even if the expense will not otherwise be allowable. Further, in the event that taxes and insurance are not part of your mortgage payment, ensure that you list these amounts separately.

  1. Duplicating deductions when your spouse is not filing bankruptcy.

    If your spouse is not filing for bankruptcy, you should take advantage of the marital adjustment deduction, however you need to ensure that expenses that are included are part of the marital adjustment deduction are not listed as ordinary deductions.