What is the "means test"?

There are two types of bankruptcy usually used by individuals -- Chapter 7 and Chapter 13.  Either can help you deal with your finances.  Chapter 13 is a payment plan type bankruptcy, that lets you pay your bills, or a portion of your bills, over three to five years.  Chapter 7, on the other hand, wipes out your dischargeable debt without a payment plan, and usually takes about four months. 

However, in 2005 Congress, after a massive lobbying campaign, enacted something called the "means test".   In the means test we add up all your income for the six months (not including the month of filing) before your case is filed.  We then divide by six, and the result is your "current monthly income". 

If your "current monthly income" is less than the median income in Minnesota for a household of the same size as yours, you "pass" the means test.  

If on the other hand your "current monthly income" is more than the median income in Minnesota for a household of the same size as yours, we go on to substract specific monthly expenses, such as mortgage payments, car payments, tax withholding, and living expenses.  Some of these expenses are what you actually spend; some of these expenses are limited to amounts specified by the Internal Revenue Service.  If there is a surplus after completing the means test there is a presumption that your case is a substantial abuse and the US Trustee may ask the court to force you into a chapter 13.

The median income is adjusted periodically according to Census Bureau information.  For example, in December, 2020 (when this post is written), the median income is as follows:

     Household of one -- $61,811

     Household of two -- $81,478.00

     Household of three -- $100,430.00

     Household of four -- $118,646.00

     For each household member over four, add $9,000.00.

As always, if you have questions, feel free to call me at 320-252-4473 to set up a meeting by Zoom, telephone or in person.  

Priorities in estate planning

Do you have a will or an estate plan? For about half of Americans, the answer is “No”. The website The Motley Fool says that estate planning is an opportunity to provide for loved ones and protect your own interests in the face of life’s uncertainties.

Many people think only the rich need to do any estate planning. But, if you have a family (most especially if you have a blended family – children with someone not your current spouse) you should consider having an estate plan. For instance, if you have children from a prior marriage, if you die without a will you may “disinherit” them. When done properly, an estate plan can help you resolve issues ranging between designating a guardian for children to passing on a family-owned small business and hopefully avoiding or reducing any intra-family conflicts.

Even if you already have a will, family changes like marriage, divorce, births and deaths happen. These life events can render an estate plan obsolete.

Also, estate planning does not mean only what happens after your death. You may want to include a Health Care Directive (often called a living will) and a durable power of attorney. The Health Care Directive is in case you cannot communicate your health care wishes; the durable power of attorney in case you are no longer able to make your own business decisions.

You may have individuals who rely on you, such as minor children or incapacitated adult family members. An estate plan can help provide that their care and maintenance continues even if you are unable to provide it yourself. You can name a guardian for your children in your will and someone to take care of your minor child’s money.

If you want to talk more about estate planning issues, call me at 320-252-4473 to talk about it.