When a Chapter 7 debtor is over the median income for his or her household size, they must then jump through another step: the means test. No, it is not an actual test, but it does provide a base line for the U.S. Trustee and creditors when determining if the debtor's case is considered "abusive" or not. Many debtors qualify for a chapter 7 when over the median income because they "pass" the means test. There are others that do not "pass" the means test, but still qualify for Chapter 7. I know, it is confusing and many bankruptcy attorneys still do not understand the whole means test concept. However, this article is not about who qualifies or not, it is about the most often overlooked deduction on the means test - the tax deduction.
When a debtor files for Chapter 7 and they are over the median income, they have to show that their case is not abusive by qualifying under the means test. One deduction under the means test is the amount of taxes that are deducted from the debtor's paycheck. However, the actual amount that should be put down is not necessarily the amount that is being deducted! The amount that should be deducted under the means test is the actual amount that the debtor should be withholding for the six months prior to the case being filed.
A good example is Debtor A that gets a large tax refund at the end of the year. Let's say Debtor A gets about $6,000 a year in tax refunds. Average that out per month and he or she is paying an extra $500 a month for taxes. So, if the debtor is paying $1200 a month in taxes, you may not be allowed to put $1200 a month down. The US Trustee would argue that you should list only $700 a month (what the debtor should actually be paying in taxes without getting a refund!).
On the flip side of things, some debtors are not paying enough towards their taxes. If the debtor averages owing $3,000 in taxes every year, and nothing has changed since last year, then it is wise to add $250 a month to the debtors tax deductions under the means test. For example, debtor B only has $500 a month in tax deductions, but should be paying $750 a month (because he owes every year!). DO NOT PUT DOWN $500 under the means test. Put down $750 a month.
So, when doing the means test tax deductions, you should find out how much should be deducted from the debtors paycheck and not just use what is actually being deducted. Doing the later could lead to many phone calls and emails from the US Trustee's office.
Brian Limbocker
Limbocker Law Firm, LLC
2470 Windy Hill Road SE Suite 300
Marietta, GA 30067
Phone: 770-933-5355
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