Form 22 and Chapter 7
What is the Means Test?
To be eligible to file for Chapter 7, debtors must qualify based on their income. Most debtors who file for Chapter 7 are under the median income for their household size and are not subject to the Form 22 “means test.”
However, for debtors who make more than the median income for their household size, their eligibility is determined by Form 22. Form 22 determines if one can afford to repay even a minimum amount to one’s creditors, and how much that amount would be.
Form 22 generates two numbers. The first number is the debtor’s average gross income over the last six full calendar months. Gross income is determined by one’s paycheck, business profit/loss for self-employed debtors, rental income, unemployment benefits, some retirement benefits, and generally almost every other source of income.
The second number is the allowed deductions. The allowed deductions are based on household size and determined in part by the IRS national standards for household utilities, food, clothing, household supplies, personal care, and the like. However, they also include deductions for the following items:
- Mortgage payments and property taxes (if greater than the standard rent allowance)
- Health care expenses such as co-pays and prescription costs
- Cost of operation for vehicles, public transportation costs, and an allowance for car payments.
- Payroll taxes, involuntary payroll deductions,
- Term life insurance for dependants,
- Court order payments (typically child support and maintenance),
- Educational expenses for a physically or mentally challenged child,
- Child care expenses, such as baby-sitting and daycare,
- Health insurance, disability insurance, healthcare savings accounts,
- Support of elderly or disabled individuals
- Some educational expenses for children under 18,
The difference between those two numbers is what one’s unsecured creditors have to receive in a hypothetical Chapter 13 filing. That difference can often be a negative number. If that number is less than $166, then it is likely a debtor will qualify for Chapter 7.
Form 22 is complicated. Recent changes in income, large tax refunds, earned income tax credits, and high mortgage and property tax expenses can cause difficulties in calculating Form 22. However, it is by no means impossible to qualify under Form 22, and many above-median debtors do file for Chapter 7 bankruptcy, especially if they have child support payments, high mortgage payments, or high monthly medical expenses.
