A Chapter 7 bankruptcy case can help you gain the fresh start you need after a financial crisis to recover and rebuild your finances. However, you must meet income requirements to file for bankruptcy relief under Chapter 7. The Chapter 7 Means Test in Maryland determines whether you are eligible to receive a bankruptcy discharge under Chapter 7. If you are a consumer debtor, passing the Means Test is the first step in determining whether you can file a Chapter 7 case. Individuals with primarily business debts typically are not required to pass the Means Test to file a Chapter 7 case.

What is the Chapter 7 Means Test for Maryland Debtors?

When Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) in 2005, they added the Means Test. The test measures your average income to the median income for Maryland. If your average income is below the median state income, you “pass” the Means Test and can proceed with a Chapter 7 filing.

However, if your average income is above the median income in Maryland, you “fail” the Means Test. You must then complete the second section of the test to determine your disposable income. If you have sufficient disposable income to pay a portion of your unsecured debts through a Chapter 13 repayment plan, you are not eligible for a bankruptcy discharge under Chapter 7.

Calculating Your Average Income for the Means Test

Your current monthly income is used to calculate your average income for the first section of the Means Test. Current monthly income is the average of all income received during the six months before filing a Chapter 7 petition. Income is based on the household, even if your spouse is not filing for bankruptcy relief.  Therefore, you need to include your spouse’s income when you calculate your current monthly income.

Income used to calculate your current monthly income includes:

• Gross wages and salaries
• Commissions and bonuses
• Tips and overtime income
• Royalties, interest, and dividends
• Unemployment compensation
• Workers’ compensation
• Annuity payments
• Net income from the operation of a business, farm, or profession
• Retirement income and pension income
• Net income from rental properties
• Spousal support and child support payments
• State disability insurance payments

In most cases, any household income is included to calculate current monthly income except payments received under the Social Security Act (SSI, SSDI, Social Security retirement, and TANF) and payments to victims of war crimes or terrorism.

Current monthly income is calculated by dividing the total income during the preceding six months by six. That result is multiplied by 12 to arrive at an average annual income. If the average annual income is below Maryland’s median income, you pass the Means Test. Income above the state’s median income means completing the second part of the Means Test.

Calculating Your Current Monthly Income is Not Always Straightforward

Some situations can make calculating current monthly income difficult. For example, if you are a tax professional and you file bankruptcy in May, your income for the past six months may be overstated because it includes the three and half months in which you earn most of your income for the year. Annual bonuses are another difficult situation in some cases. Some individuals receive a large annual bonus which can make calculating monthly income complex.

A Maryland bankruptcy attorney can help you ensure that you only include the income that is required when calculating current monthly income. You do not want to include any income that is not necessary so that you have a better chance of “passing” the Means Test without moving to the second section.

What is Disposable Income for the Maryland Chapter 7 Means Test?

Disposable income is the amount of money you have available each month after deducting allowable expenses from your current monthly income. To determine your disposable income, you deduct allowable expenses from your current monthly income. However, some expenses are not based on what you spend each month.

Expenses for food, clothing, supplies, utilities, and other common household expenses are based on the average amount for a family of your size living in Maryland. The amounts are based on the IRS National Standards for Allowable Living Expenses. The amounts are adjusted periodically. Deviations from these standards are extremely rare.

Examples of expenses that are usually based on the actual amount of the expense include alimony, child support, income taxes, car payments, mortgage payments, child care, health care, insurance, and retirement savings. However, some of those expenses may be adjusted if the court believes they are excessive.

Disposable income is calculated by subtracting your allowable expenses from your current monthly income. The Means Test uses a special calculation to determine if you have sufficient disposable income to fund a Chapter 13 plan. If so, you are not eligible for a bankruptcy discharge in Chapter 7.

Getting Help Passing the Chapter 7 Means Test

An attorney cannot change bankruptcy laws. However, an experienced Maryland bankruptcy lawyer can help ensure that you calculate income correctly and you maximize each allowable expense. Because the Means Test is a crucial factor in a Chapter 7 bankruptcy case, it is usually best to consult an experienced Maryland bankruptcy attorney if you are concerned about passing the Means Test.

Contact Pinder Plotkin LLC by calling 410-525-5337 to schedule your free consultation with a Parkville bankruptcy attorney.