The means test is found in Chapter 7 of the Bankruptcy Code and was primarily intended as a screening mechanism for Chapter 7 cases. However, it plays a significant role in Chapter 13 as well.
To recap, in Chapter 13, the debtor files a plan for paying toward his debt for three to five years by making a single fixed payment each month through a Chapter 13 trustee. The payments must be sufficient to catch up with any amount the debtor is behind on mortgages, to pay off car loans and other short-term secured debts in full, and to pay some dividend – usually a few cents on the dollar – on unsecured debts. The debtor is required to devote all his disposable income to the plan for the entire length of the plan.
When we run the means test, we first determine whether the client’s income is above or below median for his household size. In Chapter 13, this question determines the “applicable commitment period” – how long the plan must last. Those whose income is below the median for their household size must pay in for at least three years, but they can pay for up to five years if necessary to accomplish the purposes of the plan (for example, to catch up on the mortgage or to pay off past due taxes). Above median clients must pay for five years, period.
For above median clients, the means test also affects the required plan payment, at least provisionally. The bottom line of the means test is a dollar figure we call disposable income. Usually the client must pay that much each month toward his unsecured debt, in addition to payments to secured creditors. However, if future changes in income or expenses are known or reasonably certain, the plan payment can be adjusted to account for them.
The mechanics of the Chapter 13 means test vary somewhat from the Chapter 7 formula. The most obvious example is that, in calculating Chapter 13 disposable income, the debtor can deduct contributions to retirement plans such as 401(k)’s and payments on loans against such plans. Chapter 7 debtors cannot.
So while the means test cannot exclude people from filing Chapter 13 as it sometimes does in Chapter 7, it can impact how much and how long our clients must pay.