The bankruptcy means test has a fatal weakness in its attempt to keep people out of bankruptcy.
Like so much recently, it’s health care.
It’s health care, in the future, to be paid before your creditors get any money in your bankruptcy.
It works because, in a logic that only Congress could employ, the means test deducts future expenses from your past income.
That’s the universal formula that is supposed to mathematically determine whether a person genuinely “needs” bankruptcy.
If you pass the means test, you get to choose the chapter of bankruptcy that furthers your goals.
Fail, and you’re limited to Chapter 13, or some non bankruptcy form of relief.
So, the magic calculation deducts future living expenses in certain categories from income from your recent past.
But, since we don’t know what the future brings, we get to project what those deductible expenses might be.
Project: estimate or forecast (something) on the basis of present trends
The projected future expense that swings the formula has to be health care.
How the means test works
Just to review, the means test looks at your income from all sources in the six months before you file bankruptcy and calculates an annual income from that.
If your annual income, for a family the size of yours, is below the median for your state, you are free to file the bankruptcy chapter of your choice.
However, if your annual income is above median, you have to apply the means test formula for comparing future expenses against that historic income. If that formula says that you have $208 a month in discretionary income, then a Chapter 7 case is presumed to be an abuse of bankruptcy law.
The presumption is rebuttable, but who wants to go there?
So, I’ll pass you the cheatsheet, and let’s get you a qualifying score on the means test.
Health care expenses carry the day
Almost invariably, people with financial problems have postponed or underfunded their health care.
They haven’t seen a dentist in years; they’ve put off recommended tests or procedures. They don’t keep their prescriptions filled.
And the good news, for bankruptcy purposes, is that medical expenses is one of the categories of deductible expenses on the means test tied to actual costs.
While other means test deductions are standardized expenses unrelated to your real expenses, not so health care.
You get to deduct the actual expenses for your family, and the amount of the deduction is what you expect to pay for what you really need.
The underlying idea is that you don’t have money available to pay your creditors until you’ve taken care of your own health. You got that one right, Congress.
Means test opportunities
Health care expenses pop up in several places on the means test form.
First, the standardized expenses from the IRS collection standards have a per-person allowance that you get regardless of your actual expenses.
Then in the “Other Necessary Expenses” portion of the form, you deduct future expected, unreimbursed health care expenses for you and your family.
Here’s a list of possible expenses that you haven’t been paying because of your financial troubles.
- Co pays for doctor visits
- Prescription drugs
- The insurance policy deductible for your family
- Lab tests and screenings
- Needed procedures
- Physical therapy
- Eye exams
- Eye glasses
- Routine dental exams
- Needed dental work
- Mental health needs
Almost everyone I meet in the course of my bankruptcy practice has some deferred bodily maintenance.
Figure out what you and your family actually needs, price it, and deduct it.
Health insurance is deductible
Premiums for health insurances are deductible further down the form at line 25 in Additional Expense Deductions allowed under law.
Unlike many means test deductions, you can deduct the cost of health insurance even if you don’t currently have health insurance. Again the idea is that you can’t afford to pay your creditors ahead of taking care of your health.
So if you don’t have insurance, or you have inadequate insurance, price decent coverage, and include the monthly cost here.
Don’t forget any health insurance costs you are paying for dependent children away at school.
Projected medical expenses should take a healthy bite out of your projected disposable income, allowing you the unconstrained choice of bankruptcy chapter.