Living Expenses in the Means Test

When filing for bankruptcy in Alabama, there is a budget that must be performed in certain cases called the means test.  A debtor cannot devote all income to debts and is allowed to keep a certain portion of income (in the means test calculation) for necessary living expenses.  A debtor’s income is calculated by averaging out the total income for the last six months.  Then, if the second part of the means test is necessary all expenses must be subtracted from income in order to determine the debtor’s disposable income.  When calculating living expenses they generally fall into different categories such as secured debt payments, priority debt payments, and living expenses.  In this article we are talking about living expenses.

The debtor is allowed to deduct presumed amounts for food, housing supplies, clothing, personal care products and services, health care, and transportation and housing (with amount determined by the IRS Standards).  The IRS uses Collection Financial Standards when it arranges repayment plans with delinquent taxpayers.  The debtor may use the monthly expenses amounts specified by the IRS even if those expenses are higher than the debtor’s actual expenses.  However, if the debtor’s actual expenses are higher than the IRS standards then the debtor is limited to the IRS amounts.  The debtor can request an additional allowance of 5% of National Standards for food and clothing if they can show the increase is reasonable and necessary.

IRS Transportation Standards are divided into two components: ownership and operating expenses.  The Local Standards for Transportation provide expenses associated with vehicle insurance, vehicle payments, maintenance, fuel, state and local registration, parking fees, tolls, driver’s licensing and public transportation.  The housing and utilities expenses are calculated by state, county, and family size.  They are divided into non-mortgage expenses (which can be fully claimed even if the debtor’s actual expenses are less) and mortgage/rent expenses (which is reduced by the average monthly payment for debts secured by the debtor’s home).  If the debtor’s actual mortgage payment is greater than the expense allowance then the debtor is not allowed the deduction, however, the debtor can deduct the full amount as a secured debt payment.

A debtor can also deduct other necessary expenses such as taxes (federal, state and local taxes, self-employment taxes, social security taxes, and Medicare), not including real estate and sales tax, involuntary deductions for employment (mandatory retirement contributions, union dues, and uniforms.  However 401(k) loan payment is not an involuntary deduction), life insurance (term life for debtor only), court ordered payments  (not including child support arrears), education for employment or for physically or mentally challenged child, Childcare, health care (non-reimbursed health care expenses that exceed IRS standard expenses), and telecommunication services (not including basic home or cell phone service).

To properly evaluate your living expenses you should discuss your budget with a local bankruptcy attorney to ensure that you qualify to file a Chapter 7 case.  Call our local bankruptcy attorney today for a consultation.

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