Understanding the Arizona Bankruptcy Means Test in Chapter 7
When we meet with people for the first time at the Pew Law Center, they often describe their concerns about “passing” the Arizona bankruptcy means test (also known as the Arizona median income test). Attorney Lawrence ‘D’ Pew wants you to understand that there is no reason to suffer test anxiety when it comes to the Arizona bankruptcy means test! We use means testing as a uniform approach to determining whether a person may file for bankruptcy protection under Chapter 7 (liquidation) or Chapter 13 (individual debt adjustment); or whether the person may only qualify for bankruptcy relief under Chapter 13.
What Is a Presumption of Abuse under the Arizona Bankruptcy Means Test?
What the means test results indicate is whether there is any so-called “presumption of abuse” that filing Chapter 7 would be unfair to creditors. (Don’t confuse the presumption of abuse standard with that of the debtor’s guilt or innocence, which is not what the presumption implies.)
If the Arizona bankruptcy means test results in a presumption of abuse, then the client may still elect to file under Chapter 13. Only the Chapter 7 filing option is eliminated when the presumption of abuse cannot be overcome. In either case, relief is available under the U.S. Bankruptcy Code. So relax a little and continue reading more about what makes up the Arizona bankruptcy means test.
Purpose of the Means Test
When attorneys talk about satisfying the Arizona bankruptcy means test, they are referring to a income prerequisite for Chapter 7. So that everyone filing for bankruptcy anywhere in the country is treated fairly and equitably, all states have median household income tables. The tables are adjusted periodically and used in the means test to determine eligibility for a Chapter 7 filing.
We take an average of the client’s monthly income over the six-month period immediately preceding the day the petition is to be filed. If the petitioner’s monthly income is below the median household income, then there is no presumption of bankruptcy abuse – the Chapter 7 liquidation may go forward.
Don’t get frustrated! Our Phoenix attorneys can help. When the means test prevents a Chapter 7, then we simply look to Chapter 13 as the better filing alternative under the U.S. Bankruptcy Code.
Take a Closer Look…
The means test involves a series of household and income-related questions that the debtor must answer. The average monthly income of the debtor is then compared to the median household income for the area where the petitioner is located (Maricopa County, Arizona, for example). Let’s take a closer look at some of the means test components:
- State and County. Start with the debtor’s state and county of residence. We apply the state median income, county housing allowance, and regional transportation allowance for the debtor’s location.
- Declarations. The debtor makes declarations about whether he or she is a disabled veteran, has non-consumer debts, or is a reservist or national guard member. The debtor who makes any of these declarations may be exempt from taking the means test!
- Marital and Filing Status. What is the debtor’s marital status and filing status?
- Married filing separately.
- Married filing jointly.
- Household Size. What is the size of the debtor’s household and how many dependents are there?
- Average Monthly Income. Calculate the debtor’s average monthly income using accurate figures from the previous six months. (Social Security income and certain payments to victims are not included as income for means test calculations.) What income is included?
- Gross wages, salary, overtime, tips, commissions.
- Income from business or farm operation.
- Rents and any other real property income.
- Royalties, dividends, and interest.
- Pension and retirement income.
- Regular contributions from others to the household expenses.
- If the debtors are married filing jointly, then the income from both spouses must be included.
- Median Household Income Comparison. The current monthly income of this debtor is compared to the Arizona median household income for the county where the debtor resides given the family size and number of dependents. When the debtor’s average monthly income falls below the median household income, then filing under either Chapter 7 or Chapter 13 is allowed — there is no presumption of abuse to overcome.
What happens if your average monthly income exceeds the Arizona median household income? If your average monthly income exceeds the median household income under the means test, then Lawrence ‘D’ Pew will analyze your income and apply the legally recognized adjustments appropriate in your unique financial circumstances.
Frequently, adjustments to the average monthly income portion of the test will allow the Chapter 7 filing to go forward unimpeded by reducing the debtor’s monthly income to an amount that is below the median household income threshold. For many clients, adjustments – reductions to reported gross income – include some or all of the following:
- Housing expenses.
- Utility expenses
- Health care costs.
- Transportation, vehicle ownership or leasing expenses.
- Monthly tax payments.
- Mandatory payroll deductions from gross income.
- Term life insurance premiums.
- Court-ordered child support or spousal support payments.
- Educational expenses.
- Childcare costs.
- Telecommunications costs.
If you still have questions after reading this page, let us help. Check out our general bankruptcy page here or call for a free consultation.