The Long-Form Means Test: A Series

If you are researching consumer bankruptcy you have no doubt heard the terms “means test” and “long-form means test”. The means testing involved in Chapter 7 and Chapter 13 bankruptcy can be complicated and there are also jurisdictional differences that create nuances only fully understood by a bankruptcy attorney that practices in the state in which you plan to file bankruptcy.

Since I practice consumer bankruptcy in Colorado, I have strong base of knowledge as to how our five bankruptcy judges are likely to rule on the close calls and grey areas involved in means testing as well as insight into how our Trustees approach the issues. What follows is a series of blog posts designed to give a more thorough understanding of the issues involved in means testing in consumer bankruptcy.

Part One: Median Household Income, What Counts?

In order to qualify to file Chapter 7 bankruptcy, or to determine your monthly payment amount in Chapter 13 bankruptcy you must submit to a means test which analyzes your household income. If your income is above the State Median for your household size a Presumption of Abuse arises if you file for Chapter 7 bankruptcy, meaning your case could be dismissed from Chapter 7 based on your income being too high. If your income results in the dreaded Presumption you can complete the long-form means test for a second shot at qualifying for Chapter 7 or to determine your disposable income for a Chapter 13 payment plan. The long-form means test uses a combination of real-life, actual expenses and IRS standard amounts to take deductions from your income to either get you in to Chapter 7 or tell you what your Chapter 13 payment would look like.

The main component of means testing in bankruptcy is household income. In general, household income is the gross income coming into the household from employment and business. However, there are many more sources of income that are included in this figure, not all of which are required to be listed on your annual taxes such as regular gift income, child support, disability payments, unemployment pay, retirement/pension income and contributions received from any source that goes toward your household expenses.

Income Based on Paychecks

Most families or individuals looking into their bankruptcy options will be able get a good idea of this figure by looking at their year-to-date income on a pay stub or their W-2 from the prior year. However, as anyone dipping their toes into means test law soon learns, it’s never that easy.

First, in the case of an individual paid directly by an employer, the GROSS (not after tax, or net) annual income is actually determined by taking your paystubs received in the six months prior to the month you will file bankruptcy and then doubling (or annualizing) that amount. This can present problems if you receive a bonus once a year and it falls into the six month look-back period. It can also cause problems if you have had a reduction in pay or a job loss in the last six months.

Usually, the easiest way to handle a circumstance such as a bonus or an income reduction in the last six months is to wait until the six month look-back adjusts. However, if you are unable to wait until the past months adjust or until a bonus falls off, you may need to file your case with the dreaded Presumption arising, and an explanation to the trustee’s office (this is different from completing the long-form means test). This is never preferred, but can be successful in certain circumstances where the income anomaly (the bonus, etc.) is easily explained away and the gross annual income will be under median. This is not a trick to be attempted without an attorney, and it is also an approach that will add attorney time and risk to your case. In other words, it’s better to wait if at all possible.

Income Generated by Business or Contract Employment

Self-employed or contract employees present another set of issues when completing the income portion of the means test. Legitimate business expenses can be deducted from gross contract or business income on the means test. In fact the means test form is set up to allow you to input gross income by month along with a corresponding expense amount.
The key is to determine the proper expenses and amounts by month. For instance, certain annual expenses, such as liability insurance, should be divided by 12 and then 1/12th taken each month as an expense rather than deducting the full annual amount in that month. Expenses that do double-duty as personal expenses, such as utilities or vehicle expenses, can be tricky. And, unlike on your annual taxes, you shouldn’t take a business use of your home deduction in bankruptcy.

Similar issues can come up when business is seasonal or otherwise fluctuates throughout the year, but the same rule holds true as with paycheck income: waiting until the number works on the six month look-back is the safest approach.
Accurately reporting business or contract income on the means test takes detail. If you don’t do your own Profit and Loss statements, you or your attorney will need to recreate those through receipts and bank statements. It can be a significant amount of work.

Other “Income” Included in the Means Test

Aside from paycheck income and business/contract labor income there is a wealth of other “income” that must be reported on the means test, and often my clients are surprised to learn that what they thought was something that needn’t be discussed is actually income that might keep them from qualifying for Chapter 7.

Under the table, cash-based income is still income and must be reported. Failing to do so can lead to denial of a bankruptcy discharge and worse: jail time. This is true for underreporting or failure to report anything that is of material importance in your bankruptcy petition.

Money given to you as a gift can be income for the means test. The key factor is whether the gifts are regular. If you get money on a monthly or semi-monthly basis, it’s income. It’s the same with someone else paying for your expenses, such as a parent making your car payments or a boyfriend/girlfriend paying your bills. This type of income is called “contributions to household expenses” and must be reported, which usually involves a good bit of work looking over past bank statements and such.

Money received from annuities, pensions or other retirement funds is also income that must be reported on the means test. Gross amount, again. VA benefits are income. Private disability payments are income. Child support or alimony is income. Unemployment is income (actually, this is a battle that some are still fighting, but in my opinion the writing is on the wall: its income, deal with it). Gambling winnings are income (but I would argue should be set off by losses in the same six-month period) (gambling is a bigger issue than income in bankruptcy, it can be found to be a basis to dismiss your case for bad faith). Rents collected on real estate are income (again, can offset with legitimate expenses). Money being repaid to you for any reason, such as loaning money to a friend, is income. Gains realized on sold property is income. Are you sensing a theme here? The bankruptcy process wants to call almost everything income. This is why careful bankruptcy planning with an attorney is warranted in all but the most simple cases (and in my experience, there are not many simple bankruptcy cases).

Income Not Included in the Means Test

SOCIAL SECURITY. That’s about it. You do not have to count Social Security or SSDI income in the means test. (You do have to include it in your budget, but that’s a topic for another day). This exception to income generally means the social security/SSDI received by the person(s) filing for bankruptcy. However, it likely also means social security/SSDI received by a dependent child as well. This is where you need to know your jurisdiction and what your particular trustee’s office accepts.

One that note, in jurisdiction of Colorado, the trustee’s do not consider 401(k)/retirement withdrawals income, nor do they count you annual tax refund. This may be different in other states, but here you can withdraw money from a retirement fund and it will not be counted as income if it happened in the last six months. Additionally, if you receive a tax refund in the last six months, that will not count as income either. These policies are just that, since the law is unclear on these issues. That’s the thing about so much of bankruptcy law (and other practice areas), there are many shades of grey.

One more area where money received in the six months before filing will not need to be counted in calculating household income are proceeds from loans. Since loans taken by the debtor are intended to be paid back, they are not income. I would qualify this by saying “be careful”. If you historically accept gift money, for instance from a family member, you cannot stop mid-stream and decide to call it a loan. But if you legitimately borrowed money in the last six months, that won’t be income you input into the means test.

Income Increases Outside of Look-Back Period

Sometimes the six month look-back doesn’t accurately capture the forward-looking income because you have received a raise, started a new job or otherwise increased your income. This is a tricky situation. Technically, you do not have to put the income increase on the means test, since it only asks for the six months prior to the month you file for bankruptcy relief. You do need to note the increase in your forward-looking budget (Schedule I) and you also have to provide the pay stubs for the 60 days prior to the date you file the case.

Because of these requirements, the trustee is likely to note the increase in income. If the increase would have made it so you didn’t qualify for Chapter 7, or would have increased your required payment in Chapter 13, you can be held liable for that increase. This is due to a Supreme Court decision called Lanning which held that “changed circumstances” such as a post-filing increase in income can be considered by the court/trustee if that change is “known or virtually certain” at the time of filing.

Usually, a new job or increased hours at work bring along new expenses, which can also be considered. The level of risk an income increase presents in a case is very fact-specific and is a reason to contact an experienced bankruptcy attorney before filing if it applies to your situation.


Calculating your household income for purposes of the means test can be easy and straightforward. It can also be complicated and risky. Welcome to bankruptcy law, where that seems to be the norm!

As I mentioned, many of the issues in bankruptcy don’t have a “right” answer. My goal as a bankruptcy attorney is to minimize the risk of objections and complications and try to create as easy a ride through the bankruptcy process as possible for my clients. However, sometimes an issue needs to be pushed and at that point my goal is to advise thoroughly of the risk and then defend my client’s position vigorously if we are challenged. If you are struggling with debt, a good bankruptcy attorney can do wonders for your peace of mind and also your bottom line.