Bankruptcy Planning: Overcoming The Presumption Of Abuse Through Allowances

If a debtor earns more than the median income for their state, they must take the bankruptcy means test. The reason the bankruptcy means test was implemented was to prevent abuse of the bankruptcy process. Specifically, the architects of the 2005 bankruptcy reform act, wanted to make sure that those who earned enough money to repay their debts did so in Chapter 13 bankruptcy.  However, just because someone earns more than the median income in their state does not mean that they can afford to repay their debts. That’s where the means test comes into the picture. The bankruptcy means test allows debtors to overcome the presumption of abuse by deducting allowances from their income, in effect reducing their projected disposable income and possibly qualifying them for a Chapter 7 bankruptcy filing.

Below are a few allowances debtors taking the bankruptcy means test should consider:

  1. The bankruptcy means test allows a certain dollar amount of allowances depending on the size of the debtor’s household. The larger the household, the larger the allowance.
  2. If a debtor has members of their household who are over 65 years of age, they may be able to receive an additional allowance, which will further reduce their projected disposable income in bankruptcy.
  3. The bankruptcy debtor may be able to deduct from their projected disposable income housing expenses such as electricity, gas, water and trash pickup.
  4. The bankruptcy debtor may also deduct their average monthly mortgage payment from their income on the means test.
  5. Vehicle operation costs, such as a debtor’s monthly payment and insurance may be deductible on the bankruptcy means test. However, simply owning a vehicle may not give the debtor access to this allowance. Bankruptcy courts have been split on giving this allowance to those who do not have a monthly car payment.