The Bankruptcy Means Test (Part Three)

Photo by Kim Held

Photo by Kim Held

Written by Charleston Bankruptcy Lawyer, Russell A. DeMott

In part one and part two of The Bankruptcy Means Test, I explained the shaky foundation of the means test: Current Monthly Income, or CMI for short.   This post will address the issue of what happens when you pass the means test if you have above-median income or don’t even have to take it at all because your income is below median.

The purpose of the means test is to assist the court in determining whether a Chapter 7 case would be an abuse.   But what if you either (a) take the means test and pass it, or (b) don’t even have to take it because your income is below median income for your state?   Does that mean you automatically qualify for a Chapter 7 bankruptcy?   No.

Think of the means test as just one tool the court has to determine whether you should be granted a Chapter 7 discharge of your debts.   Remember, there are no payments in Chapter 7.   Chapter 7 allows you to wipe out debt without any repayment to creditors.

The means test is one of two tests applied to Chapter 7 cases.   The other test is the totality of the circumstances test, and it’s far more important than the means test.   Under this test, the court looks at “you guessed it” the totality of the circumstances to determine whether you should be allowed to discharge your debts in Chapter 7.

Truth be told, I really don’t think the vast majority of judges care much for the means test.   Some have, in so many words, said as much in their opinions.   It’s a mechanical test that often yields bizarre results.  For example, the means test allows for an unlimited amount of secured debt to be deducted from the amount the debtor has to pay his unsecured creditors.

I see this all the time in my Charleston, South Carolina practice.   A debtor with a large house payment and a couple of large car payments will pass the means test, but a debtor who rents and has no car payments will not pass it.

Let’s take an extreme–and purely made up–example.   A husband and wife (family of two) has an annual income of $118,000.   Median income (the 50th percentile) for a South Carolina household of two is about $51,000.   Our hypothetical couple earns way more than that.

Let’s further say they have mortgage payments totaling $4000 per month, one car payment of $800 per month, and another car payment of $1400 per month.   Will they pass the means test?   Yes.   They are loaded up with a ton of secured debt, and the means test allows an unlimited amount of secured debt to be deducted from what the debtor should pay his creditors.

Will our hypothetical couple be able to discharge their debts in Chapter 7?   Absolutely not.   Why?  Because under the totality of the circumstances test, it would be obscene to allow these debtors to wipe out their debt and continue paying for a very expensive house and two very expensive cars.

Having said all this, I want to stress that this would be the result in South Carolina.   Our court has found several Chapter 7 cases abusive, and in each of those cases, the debtors actually passed the means test.   In other districts–though not many–the bankruptcy courts have reasoned that if the expense (including secured debt) is allowed on the means test, the court will not review the reasonableness of the expense.

There are two critically important principles to learn from this:

  • Just because you pass the means test does not mean the bankruptcy court will grant you a Chapter 7 discharge.
  • Our new bankruptcy law is interpreted in wildly different ways in different bankruptcy districts.   What may work in, say, California, may not work in South Carolina.   Get local bankruptcy advice from a bankruptcy lawyer in your area.

In “The Bankruptcy Means Test (Part Four),” I’ll examine some factors the South Carolina Bankruptcy Court has used to review the totality of circumstances test.


  1. […] the facts are not in dispute.  It’s about what this case means, what can be claimed on the means test, or how to interpret a statute, to give just a few examples.  And it’s often […]

  2. Abbey Christian says:

    Filing Chp. 7 due to medical issues. If you receive benefits from a health insurance
    policies such as a hospital policies that pays you directly for the days you are in a hospital,
    pays you when you are diagnosed with a covered illness (stroke, heart attack), or if
    you have a certain procedure done (cancer treatment).

    Do these qualify as income for filing Bankruptcy 7 and is that income then averaged
    for the entire year?

    Thank You!

  3. Russ DeMott says:

    Yes. But I would not worry too much about it. Your “income” for the “current monthly income” calculation is virtually any money coming in (with some narrow exceptions.) The real issue is what is your income going forward? We see these spikes in income during the CMI period all the time due to overtime that’s now gone, a spouse’s income when the couple is getting divorced (the non-filing spouse’s income will be gone in a month or two), and for a variety of other reasons. I would not get too focused on this. Passing the means test is NOT the most important qualifying factor for Chapter 7, it’s the “totality of circumstances” test.

Leave a Reply