Written by Charleston Bankruptcy Lawyer, Russell A. DeMott
The means test analysis begins with calculating your current monthly income (“CMI”). This is one of the many concepts I detest about our new bankruptcy law, the Bankruptcy Abuse Prevention and Consumer Protection Act (“BAPCPA”). Despite its name, CMI isn’t really current monthly income. I can hear my high school history teacher introducing the Holy Roman Empire to the class and describing it as “neither Holy, nor Roman, nor an Empire.” So, too, CMI is neither current, nor monthly, nor–in many cases–even income. (More on that in another post.)
There may be a significant difference between your real current monthly income (I like to refer to it as “RCMI”) and CMI. “Huh?” you say. Let me explain.
CMI is a defined term in the bankruptcy code. CMI is defined as income received in the six months prior to the month in which you file your bankruptcy. For example, if you file your case in October, you calculate CMI by averaging the income you received in April, May, June, July, August, and September. That’s your CMI. And your CMI may be very different from your RCMI (your real income at filing).
Let’s say you had a really good job, but in May, you lost it. In two of the months we use to calculate CMI, you had a high income, but in the last four of those months, you had no income (or just unemployment). The two months skew the calculation and make it look like you earn more than you really earn at the time you file bankruptcy. Calculating CMI is a huge waste of time requiring you to provide pay stubs to your attorney and for him to input all this into a spreadsheet. It causes lots of busywork, and it’s meaningless. What really counts is RCMI. You can’t pay your creditors back with money you no longer earn at the time you file your bankruptcy!
When you calculate your CMI, you annualize the income calculation. (So if you earned $30,000 in the magical six-month period, your annual income would be $60,000.) If that income is more than the median income for a household of your size in your state, you must then complete the entire means test form, which is much like a tax return of sorts. The term “median” is just a fancy word for the 50th percentile. In other words, half of the families of your size in your state are above the median and half are below the median.
Median income is different for each state and is adjusted annually. I previously posted the new median income figures for South Carolina, which were effective November 1. Taking a hypothetical family of four as an example, you can see that median income is $65,655, so if by using the CMI six-month average, your family income is greater than that amount, you must complete the means test form.
IMPORTANT: Just because your household income is over the median income doesn’t mean that you will be required to file a Chapter 13 bankruptcy. It simply means you must complete the means test form, nothing more and nothing less.
All this underscores the need to understand your RCMI. What are you really making? If your RCMI is significantly lower than CMI, you may want to wait a few months to file your case. In some instances, having to take the means test and not having to take the means test may boil down to filing on Monday the 3rd day of the next month, instead of on Friday, the last day in the previous month. You can see the absurdity of the CMI idea.
In “The Bankruptcy Means Test (Part Three)” we’ll digress a bit and examine issues you must face when either (a) you are not required to take the means test, or (b) you take the means test and pass it.