Passing the Means Test in Colorado: Making Sure all Monthly Expenses are Counted

May 25, 2011
By: David M. Serafin

Under the new bankruptcy laws created by Congress, almost all bankruptcy filers in Denver and other areas of Colorado have incentive to account for as many legitimate monthly expenses as possible to either pass the Means Test and qualify for chapter 7, or to minimize their chapter 13 plan duration and monthly plan payment. Higher monthly expenses will offset a bankruptcy debtor’s gross income and will lessen projected disposable income payable to unsecured creditors under either chapter 7 or 13.

A bankruptcy debtor with a household income less than the median family income will automatically qualify for chapter 7 without having to take the Means Test. For others with a higher income, the Means Test examines the monthly expenses of the debtor and other household members to determine either chapter 7 eligibility or the terms of a chapter 13 payment plan.

As the Means Test notoriously allows some expenses while disallowing others, it is important (albeit seemingly arbitrary) to incur the “right” type of monthly expenses, which include the following:

• Housing – Do you have one or more mortgages, or do you rent? The existence of a higher mortgage or rent payment will offset gross income. This may include rental or investment properties to be retained after bankruptcy.
• Vehicles – Do you have a car payment? If so, how much and when do expect to pay off your car (during the next 3 to 5 years or later?)? The existence of a car loan which is not expected to be paid off until after 3 to 5 years after a bankruptcy is filed (depending upon other factors). Also, how old is your vehicle and what is the mileage? (Older vehicles with higher mileage may be eligible for an additional Means Test deduction.)
• Out-of-pocket medical/dental expenses - The Bankruptcy Code recognizes IRS allowances for Means Test deductions and, typically, an additional Means Test deduction can be taken if the average monthly out of pocket medical/dental expenses exceed $60/person for Colorado Bankruptcy filers.
• Health, life and disability insurance (whether deducted from your pay check or paid out of pocket)
• 401k) or IRA - in chapter 13 cases only, an additional Means Test deduction is allowed for contributions made to a qualified retirement account.
• Non-dischargeable (e.g. Priority) taxes - The Means Test typically allows a monthly deduction for the overall amount of Priority taxes owed (divided by 60 months).
• Other Means Test deductions include those for charity, private school expenses, or payments made to an elderly or disabled relative (who is unable to pay for such expenses).
• The Bankruptcy Code definition of household member is broader than the IRS definition of dependent. As such, your bankruptcy attorney will ask about all of your household members, including children and elderly relatives. Generally, the Means Test treats debtors with a higher number of household members more favorably (although any income of the household member – excluding Social Security retirement benefits - is to be added included in the Means Test).