Bankruptcy - Current Monthly Income (CMI) & The Means Test

As of October 17, 2005, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 went into effect attempting to change how bankruptcies are filed and how people are determined to be eligible for one chapter of bankruptcy debt relief or the other. While procedurally things changed, the net outcome is that over 90% of all individuals still qualify for the same chapter of bankruptcy they did before the law change. So what’s different? Now, the courts utilize the “Means Test” derived from IRS manuals regarding tax collection to determine whether or not individuals have some ability to repay part of their debt over a 3 to 5 year period of time or whether they are eligible to eliminate their debts due to a complete inability to make any meaningful repayment to creditors.

The means test calculation starts with determining the individual’s “current monthly income” or “CMI.” What one will soon realize in reviewing the definition of CMI is it is not necessarily “current,” or “monthly,” or “income.” CMI is defined under 11 U.S.C. § 101(10A) as “The average monthly income received by the debtor over the six calendar months before commencement of the bankruptcy case, including regular contributions to household expenses from non-debtors and income from the debtor's spouse [in a community property state like Texas], but not including social security income and certain other payments made because the debtor is the victim of certain crimes…”

People whose annualized household income as determined by the calculation of the CMI is under the median family income for a household of their number in their state actually are not determined by the means test but by a disposable income test, i.e. a reasonable income to expense ratio analysis to determine whether or not the individual has the ability to pay any reasonable amount back to creditors. Those over the median family income are determined by the means test as modified by current case law.

For Texas, median family income is shown below:

Annual Median Family Income - Texas
1-person families             $38,545
2-person families             $54,908
3-person families             $57,053
4-person families             $66,400
5-person families             $73,300

Thus, often times, the income earned by individuals or families in the six months leading up to filing of the case can, particularly in a Chapter 7, determine eligibility of filing or at the very least, the timing of filing. Under a recent ruling that affects cases in the Fifth Circuit Court of Appeals (which includes all of Texas) that modifies federal bankruptcy law, the CMI or currently monthly income has no bearing however, on a Chapter 13 determination of how much debt has to be paid back in a Chapter 13 case. Thus, true current income projected at the time of filing a Chapter 13 case determines the amount of payments one has to make and how much has to be paid back to creditors rather than some random historical six month “look-back” analysis.

The means test is calculated as described in Section 707(b)(2) of the Bankruptcy Code to determine whether an individual debtor's chapter 7 filing is presumed to be an abuse of the Bankruptcy Code requiring dismissal or conversion of the case (generally to chapter 13). Abuse is presumed if the debtor's aggregate current monthly income (see definition above) over 5 years, net of certain statutorily allowed expenses is more than (i) $10,950, or (ii) 25% of the debtor's non-priority unsecured debt, as long as that amount is at least $6,575. The debtor may rebut a presumption of abuse only by a showing of special circumstances that justify additional expenses or adjustments of current monthly income.

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