Will My Mortgage Help Me Pass the Means Test?
If you are filing for Chapter 7 bankruptcy, having a mortgage may make it easier for you to pass the means test.
If you have a mortgage on your home, your mortgage payment may help you qualify for Chapter 7 bankruptcy by making it easier to pass the Chapter 7 means test. This is because on the means test you can deduct your mortgage payment and payments on other home loans, as well as payments towards mortgage arrears, overdue homeowner’s association dues, and back real estate taxes. Read on to learn how the means test works and how mortgage payments can help you pass it.
What Is the Chapter 7 Means Test?
If your income is below the median income in your state for a household of the same size as yours, then you are eligible to file for Chapter 7 (assuming you meet other eligibility criteria). However, if your income is higher than the median income in your state, then you must pass something called the Chapter 7 means test. (Learn how to compare your income to the state median income.)
The means test takes your gross income and subtracts your expenses to determine whether you will have any disposable income available to pay creditors a monthly payment. If this calculation shows that you have little or no money left over at the end of the month, you pass the means test. If you don’t pass the means test, you cannot file for Chapter 7 bankruptcy. Instead you’ll have to file for Chapter 13 bankruptcy.
For some types of expenses you can use the actual dollar amount that you spend. For others, you must use a standardized amount. The higher your expenses and the more deductions you can take, the more likely it is that you’ll be able to pass the means test. (Learn more about how the Chapter 7 means test works.)
Deducting Your Mortgage on the Means Test
On the means test you can deduct payments you make on secured debts, like car loans and mortgages. You can also deduct a standard amount for housing, which is based on the county where you reside. You can find your local housing allowance amount on the website of the U.S. Trustee. These amounts are updated frequently.
If your actual mortgage payment is higher than the standard housing allowance, you can use the mortgage payment amount instead. (Keep in mind that you must use one or the other, not both.) In this way, having a mortgage payment, if it’s higher than your standard housing deduction, can make it easier for you to pass the means test.
Deducting Payments for Second Mortgages and Other Loans Against Your Home
If you make payments on other loans against your house, you can add up these monthly payments and deduct them on the means test as well. This includes not only debts like second mortgages and home equity loans but any loan that required you to give the lender a security interest in your house. (A typical example of such a loan would be an agreement to finance new windows or similar home improvement, which may have involved a lien against the house for the balance of the debt.)
Deducting Back Mortgage Payments
If you have fallen behind on any of your mortgage or home loan payments and are trying to catch up the arrears, you can also deduct a certain amount on the means test which you’ll put towards repaying those arrears. To calculate the amount you can deduct, take the total amount that you have fallen behind and divide it by 60.
You can deduct this amount even if you have not entered into an agreement to repay the arrears, as long as you do intend to repay them at some point and keeping the property is necessary for you or your dependents. A house that you live in would certainly fall within this category. However, a vacation house or one you are keeping for investment purposes would not. It could, however, include a house you are currently renting out for a profit if that rental income helps support you.
Keep in mind, however, that Chapter 7 bankruptcy does not have a mechanism for you to catch up on mortgage arrears through the bankruptcy. If you don’t have a separate agreement with your lender, your lender can foreclose on your home if you are behind on payments.
Deducting Back Homeowner’s Association Dues and Overdue Real Estate Taxes
On the means test, you can also deduct arrears on homeowner's association dues and real estate taxes. The calculation is the same as for mortgage arrears – take the total amount of arrears and divide by 60.
No Deduction If You Will Give Up Your Home
If you plan to surrender your home in bankruptcy, you cannot deduct any of your mortgage or home loan payments or arrears on the means test. You can, however, still claim your standard housing allowance for your region.
There is one exception. If you are filing bankruptcy in the First Circuit (Maine, Massachusetts, New Hampshire, Puerto Rico, and Rhode Island), you might be able to deduct your mortgage payments on the means test, even if you plan to surrender your home. But even then, many courts frown upon this practice. Generally speaking, mortgages you no longer intend to pay will not help you on the means test.