Order Code RS22058
February 18, 2005
CRS Report for Congress
Received through the CRS Web
Bankruptcy Reform: The Means Test
Mark Jickling
Specialist in Public Finance
Government and Finance Division
Summary
Consumer bankruptcy reform legislation — S. 256 and H.R. 685 — is again before
the Congress. A key provision of the current bills, which seek to address abuse of the
bankruptcy process, is to make petitions for debt relief under Chapter 7 subject to a
means test. Bankruptcy petitioners with relatively high incomes could be prevented
from filing under Chapter 7 (where many unsecured debts are discharged, or wiped out,
by the court) and instead given the choice of converting to Chapter 13 (where some debt
must be repaid out of future income) or having their petitions dismissed and receiving
no bankruptcy relief at all. The means test takes into account the petitioner’s income,
debt burden, and allowable living expenses, which can vary significantly according to
the debtor’s place of residence and particular circumstances. If income minus allowable
living expenses exceeds certain levels, a Chapter 7 petition is presumed to be abusive.
This report sets out the details of the means test calculation. (For a general overview of
bankruptcy reform legislation, see CRS Report RL32765, The “Bankruptcy Abuse
Prevention and Consumer Protection Act of 2005,” S. 256, in the 109th Congress, by
Robin Jeweler.)
This report will be updated if the means test provisions are amended or if different
versions are proposed.
Virtually all consumer bankruptcies are either Chapter 7 or Chapter 13 cases.
Chapter 7 is the most common form of bankruptcy, accounting for 72% of non-business
filings in fiscal 2004, or over 1.1 million cases. In Chapter 7, the debtor’s assets are
liquidated and distributed among creditors, and many remaining debts are discharged, or
cancelled, leaving the debtor free to make a fresh start. (Some debts are not
dischargeable, and secured debts like mortgages are not affected by bankruptcy.) In
practice, most Chapter 7 filings are “zero asset” cases, where unsecured creditors get
nothing. (Several types of assets are exempt from liquidation and cannot be distributed
to creditors.)
In Chapter 13 bankruptcies, debtors with regular incomes agree to a plan to pay back
some or all of their debt over a period of several years. At the plan’s conclusion,
remaining debts are discharged. An advantage of Chapter 13 for debtors is that a wider
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range of debts can be discharged than under Chapter 7. If the debtor is unable to complete
the series of payments required by the Chapter 13 plan, the case may be dismissed or
converted to Chapter 7. Upon dismissal, remaining debts are not discharged, unless the
court finds that the debtor cannot justly be held accountable for failure to complete the
plan, and creditors have received at least the amount of repayment they would have
received under a Chapter 7 filing. Under current law, the choice of chapters is left to the
debtor.
Supporters of reform have long argued that the “excessive generosity”1 of the current
bankruptcy system encourages abuse and allows some debtors to repudiate debts that they
can afford to repay, at least in part. The bankruptcy reform bills respond to these concerns
by restricting access to Chapter 7 in cases where debtors’ income is determined to be
sufficient to repay some debt, after allowing for reasonable living expenses. The means
test set out in Title I of S. 256 and H.R. 685 would determine eligibility for Chapter 7
relief. Debtors who “passed” the means test would either have their Chapter 7 petitions
dismissed or converted to Chapter 13 or Chapter 11.2 (Conversion would not occur
without the debtor’s consent, but no other form of bankruptcy relief would be available.)
The Basic Test
Under the proposed means test, a Chapter 7 filing is presumed to be abusive if the
debtor’s monthly income, reduced by numerous allowances and living expenses
(discussed below), and multiplied by 60 (that is, over a five-year period), is greater than
$10,000. If income thus adjusted is less than $6,000, there is no presumption of abuse,
and the debtor is free to choose Chapter 7. If adjusted income is between $6,000 and
$10,000, abuse is presumed only if income exceeds 25% of nonpriority, unsecured debt
in the case. An abusive Chapter 7 filing is subject to dismissal or conversion.
Living Expenses and Allowances
A key determinant in whether a debtor passes the means test is the amount by which
actual monthly income3 is reduced by various allowances and living expenses. The bills
set out several categories of allowable monthly expenses.
Debtors’ monthly expenses are calculated primarily by referring to a set of
allowances established by the Internal Revenue Service (IRS) that are used to help
determine a taxpayer’s ability to pay a delinquent tax liability.4 The allowances, which
the IRS calls Collections Financial Standards, set out monthly living expenses in three
1 See testimony of Todd J. Zywicki before the Senate Committee on the Judiciary hearing on S.
256, Feb. 10, 2005.
2 Chapter 11 is used primarily in business reorganizations. It is rarely used by individuals
because of its complex and expensive procedural requirements.
3 “Current monthly income,” as defined in the bills, includes nontaxable income and payments
from third parties (such as alimony or child support) but excludes Social Security benefits.
4 In other words, the IRS will take all the taxpayer’s disposable income except for these
allowances. See [http://www.irs.gov/individuals/article/0,,id=96543,00.html]

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basic categories: (1) food, clothing, and other items; (2) housing and utilities; and (3)
transportation. The allowable living expenses are subject to several variables.
In the food, clothing, and other5 category, the IRS sets out living expenses that vary
according to the size of the household and gross monthly income. For example, a single
person with a gross income of $832/month would be allowed $403 in living expenses,
while a family of four earning $5,834/month would be allowed $1,564 for expenses in this
category. These amounts are uniform across the contiguous 48 states; higher schedules
are provided for Alaska and Hawaii.
The allowance for housing and utilities varies according to size of household and
geographical location. The standards provide separate dollar figures for each county in
the nation, for households of one or two, three, and four or more persons. A single person
living in Wilkinson County, in southwest Mississippi, would be allowed to deduct
$774/month, while a family of four in Manhattan would be allowed $4,799.
The transportation standards provide regional allowances,6 with variations for
persons living in any of 28 specified metropolitan areas. Allowable living expenses
include ownership costs ($475 for one car, an additional $338 for a second car) and
operating costs (or public transportation costs, for those with no car). Operating or public
transportation allowances range from $161 per month for nondriving Pittsburghers to
$479 for New York City residents with two cars.
These allowances are not reduced if actual expenditures are less than the standard.
In some cases, the IRS recognizes actual expenses that exceed the standards; under S. 256
and H.R. 685, a debtor’s monthly expenses may include actual expenses in categories
specified as Other Necessary Expenses by the IRS for the area in which the debtor resides.
Beyond the IRS allowances, the reform legislation would permit current income to
be reduced by several other types of expenses. Reasonable and necessary expenses to
maintain the safety of the debtor’s family from family violence (as identified under
Section 309 of the Family Violence Prevention and Services Act) are recognized. (These
expenses would normally be for counseling services.)
In addition, monthly expenses for purposes of the means test may include:
! reasonable and necessary spending to care for an elderly, chronically ill,
or disabled member of the debtor’s immediate family or household;
! actual expenses for the primary or secondary education of a dependent
child (under age 18), up to $1,500 per child per year;
! home energy costs in excess of the IRS housing and utility standards,
with proper documentation and justification;
5 “Other items” include housekeeping supplies, personal care products and services, and
miscellaneous.
6 The regions are Northeast, Midwest, South, and West.

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! average monthly payments on secured debts (most commonly home
mortgages and car loans);
! average monthly payments on priority claims (e.g., child support, student
loans, alimony, etc.); and
! administrative costs incurred in a Chapter 13 bankruptcy plan.
Finally, a debtor may claim higher monthly expenses if special circumstances exist
that require additional expenditures. To establish special circumstances, the debtor must
itemize such expenses and explain in detail why each of them is reasonable and necessary.
Given the number of factors that may reduce monthly income for purposes of the
bankruptcy means test, it is clear that simple gross income is not a good indicator of
whether a debtor will be allowed to file Chapter 7. Because some of the allowable
expenses can be very large in dollar terms (e.g., support for the elderly or infirm), it is not
difficult to imagine hypothetical cases in which a debtor with a relatively high money
income would be allowed to make a fresh start under Chapter 7, while a lower-income
filer might have to choose between Chapter 13 and dismissal. Other provisions of the
reform legislation address this potential disparity by creating safe harbors for lower-
income individuals and households.
Safe Harbor Provisions for Below-Median Income Households
Under S. 256 and H.R. 685, a motion must be filed in bankruptcy court to dismiss
or convert a Chapter 7 petition. Who may bring such a motion would depend on the
debtor’s income.
The bills provide that if the debtor’s income exceeds the median family income
(adjusted for household size) as calculated by the Bureau of the Census for the applicable
state, any party in interest, including a creditor, may bring an abuse motion under section
707(b).
If the income of the debtor (or debtor and spouse, in a joint filing) is less than or
equal to the median family income (taking household size into account) for the applicable
state, only the judge or a bankruptcy trustee or administrator may file a motion to dismiss
or convert a Chapter 7 petition.
If the combined income of the debtor and the debtor’s spouse is equal to or less than
the state median income for a single-earner household (again adjusted for household size),
no motion to dismiss or convert may be filed.

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