Mistakes to Avoid on the Bankruptcy Means Test

Learn about common errors people make on the means test when filing for Chapter 7 bankruptcy.

by: , Attorney

Before you can file for Chapter 7 bankruptcy, you must take the bankruptcy means test to see if you qualify. While the means test has instructions on how to complete each item, mistakes are still common because it’s a lengthy and complicated form. Read on to learn more about the most common mistakes to avoid on the bankruptcy means test.

For more information on what the means test is in bankruptcy and how to complete it, see The Means Test in Chapter 7 Bankruptcy.

Using an Incorrect Household Size

Using the correct household size on the means test can have a big impact on whether you qualify for Chapter 7 bankruptcy or not. On the means test, your household size determines:

  • the median state income you must compare your income against, and
  • the standard deduction amounts you can claim for certain expenses.

While calculating your household size may sound easy, bankruptcy courts use different approaches when determining who counts as a member of your household. Since the rules may vary depending on where you live, research which method your local bankruptcy court uses or talk to a knowledgeable bankruptcy attorney in your area prior to filing your case.

To learn more about the different approaches used to calculate household size, see How to Determine Household Size for the Bankruptcy Means Test.

Miscalculating Your Income

When determining whether you qualify for Chapter 7 bankruptcy, the means test compares your average income for the six months prior to your bankruptcy (ending on the last day of the calendar month before your filing date) against the median state income for a same size household.

This means that the income figure on your means test can differ greatly from your current income. As a result, make sure to follow the instructions on the form and calculate your six-month average for each source of income you must include on the means test.

Claiming Deductions You Are Not Entitled To

The Chapter 7 means test only allows debtors to deduct certain kinds of expenses on the form. Some of the most common expenses you can’t deduct include voluntary retirement plan contributions and retirement account loan payments. (To learn more, see Can You Deduct Retirement Contributions on the Bankruptcy Means Test?)

In addition, many debtors erroneously claim the standard car ownership deduction even though they don’t make monthly car loan or lease payments. In general, if you own your car free and clear, you may claim the vehicle operation expense on the means test but not the car ownership deduction. (For more information, see The Car Ownership Deduction and the Bankruptcy Means Test.)

To avoid a challenge from the bankruptcy trustee, review the instructions for each expense deduction carefully to make sure you don’t claim any expenses you are not entitled to on the means test.

Not Taking Advantage of the Marital Adjustment Deduction

If you are married but filing for bankruptcy without your spouse, you must still include your nonfiling spouse’s income on the means test if you share a household. If your spouse has a significant amount of income, this can make it harder for you to pass the means test.

However, the means test allows you to exclude the portion of your nonfiling spouse’s income that is not contributed towards your household expenses in the marital adjustment deduction section. This means that the marital adjustment section can help you pass the means test by allowing you to deduct your spouse’s separate personal expenses from your household income.

To learn more about what expenses qualify for the marital adjustment deduction, see The Marital Adjustment Deduction and the Bankruptcy Means Test.

Overestimating Your Taxes

When calculating income tax expenses on the means test, many debtors simply use the amounts withheld from their paychecks each month. But you can only deduct the amount of your actual tax liability on the means test. This means that if you receive a large tax refund each year, you may be overestimating your tax deduction by using your withholdings.

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