If you have been struggling financially and are considering filing for Chapter 7 bankruptcy in Michigan, you may be surprised to learn that some of the very decisions you made to save money can actually work against you under the bankruptcy means test.

For example, imagine two people who earn exactly the same income. Both have the same household size, similar debts, and similar living expenses. The first person has been financially responsible, paid off an older vehicle, and continued driving it rather than taking on another car payment. The second person drives a newer vehicle with a substantial monthly loan payment.

Under the Chapter 7 means test, the person with the paid-off vehicle may have less room in the budget for an allowable vehicle ownership expense than the person making a car payment. Depending on the circumstances and the applicable expense rules, that difference could affect whether either person qualifies for Chapter 7 bankruptcy.

Does that seem fair? In my opinion, it illustrates one of the significant shortcomings of the means test.

I have spent 35 years practicing bankruptcy law and have represented more than 25,000 people. I have seen firsthand how difficult it can be for hardworking Michigan families to make ends meet. The means test is intended to determine whether someone has the financial ability to repay creditors, but the formula does not always reflect the financial reality facing the person sitting across my desk.

What Is the Chapter 7 Means Test?

Congress created the bankruptcy means test as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Its purpose was to identify individuals who might have enough disposable income to repay some of their debts rather than receive a Chapter 7 discharge.

The test generally begins by looking at your income over the six full calendar months before filing bankruptcy. That figure is used to calculate your annualized current monthly income, which is compared with the applicable median income for a household of your size in Michigan.

If your income falls below the applicable median, you will generally pass the means test’s income threshold. If it is above the median, the analysis becomes more complicated. Certain expenses and deductions are used to calculate whether you have sufficient disposable income under the statutory formula.

Here is where the problem begins: the means test is a formula, not a complete examination of your actual financial circumstances.

It uses a combination of actual expenses, standardized allowances, and specific legal rules. Some deductions reflect what you actually pay, while others are based on IRS National or Local Standards, subject to the bankruptcy rules. Certain secured debt payments and other permitted deductions are treated separately.

The result is that two people in nearly identical financial circumstances can receive very different results simply because their expenses fall into different categories under the formula.

1. The Paid-Off Car Versus the Expensive Car Payment

This is one of the easiest ways to understand why the means test can produce results that seem backwards.

Consider two Michigan residents who each earn $75,000 a year, have the same household size, and owe substantial credit card and medical debt.

Person A has been frugal. They drive a 10-year-old vehicle that is paid off. They maintain it, keep up with necessary repairs, and avoid taking on another monthly loan payment.

Person B has a newer vehicle. They have a $750 monthly car payment and continue making payments on the loan.

Person B has a real monthly expense that Person A does not. Under the applicable means-test rules, qualifying secured debt payments can reduce the amount of income available for the means-test calculation. The rules also provide a standardized vehicle operating expense and may allow an ownership expense, subject to the applicable requirements.

The important distinction is that a paid-off vehicle generally does not qualify for the same loan-payment deduction as a vehicle with an outstanding secured debt. That does not mean the person with the older car receives no vehicle expense allowance at all; operating expenses and ownership expenses are treated differently.

But the practical concern remains. Person A may have less room in the means-test calculation despite having made the financially conservative decision.

Meanwhile, Person B’s $750 payment can potentially reduce the calculated disposable income, even though that person is committed to a substantial monthly debt obligation.

Of course, buying a more expensive vehicle solely to improve a bankruptcy means-test result would be a terrible financial strategy. A car payment costs real money, and the means test is more complicated than simply subtracting the payment from income.

My point is different: the means test can reward the existence of certain expenses without adequately recognizing the financial discipline involved in avoiding them.

And in Michigan, where many people must drive to work, take their children to school, and get to medical appointments, owning a reliable vehicle is often a necessity rather than a luxury.

2. Housing Costs That Do Not Match the Standard Allowances

Housing is another area where the means test can fall short of reality.

The cost of renting or owning a home varies dramatically across Michigan. A household in one community may pay substantially more for housing than a household with the same income in another part of the state.

Renters face rising rents, security deposits, utility bills, and the expense of moving when a landlord raises the rent. Homeowners may face mortgage payments, property taxes, homeowners insurance, repairs, and utility costs.

The means test does not simply accept every dollar you actually spend on housing. Applicable housing and utility standards, geographic limits, and specific rules determine which expenses may be counted and how.

That creates a potential problem for someone whose actual housing costs exceed the applicable allowance.

Suppose a person is already paying a substantial amount for rent because affordable housing is difficult to find near their job. Their actual budget may leave almost nothing at the end of the month. Yet the means-test calculation may not fully recognize the difference between what that person actually pays and what the applicable standard permits.

A person can be genuinely struggling to keep a roof over their head and still have a means-test calculation that looks more favorable than their real financial situation.

3. Medical Expenses and Health Insurance

Medical debt is one of the most common reasons people consider bankruptcy. Unexpected medical bills, chronic health conditions, prescriptions, deductibles, copayments, and insurance premiums can overwhelm a household that was previously getting by.

Even people who have health insurance can face substantial out-of-pocket expenses.

Consider a family whose employer-sponsored health insurance covers only part of its medical costs. One spouse may need ongoing treatment, a child may require specialist care, or a family member may have accumulated thousands of dollars in deductibles and copayments.

The family may be making difficult choices between paying medical bills, buying groceries, and keeping up with other obligations.

The means test does provide for certain health insurance, disability insurance, and health-care-related expenses. However, not every expense is treated the same way, and the formula does not necessarily capture every dollar a household spends on medical care.

There is also an important distinction between the medical debt that a person owes and the ongoing medical expenses needed to maintain their health. The means test is not a simple calculation that deducts every medical bill from income.

For someone with significant ongoing medical expenses, that distinction can matter.

In my practice, I believe it is important to examine the actual circumstances rather than assume that an income figure tells the whole story.

4. Food, Groceries, and Household Necessities

Anyone who regularly shops for groceries knows that feeding a family is not inexpensive.

Food prices affect virtually every household, but the impact is especially significant for families with children, people with dietary restrictions, and households already spending a large portion of their income on housing and transportation.

The means test uses standardized National Standards for food, clothing, personal care, and certain other necessary expenses. Those standards are not simply a record of what a particular family actually spends.

That can create a disconnect between the formula and the grocery receipt.

A family might shop carefully, compare prices, use coupons, and prepare meals at home, yet still struggle to keep food costs within its budget. Another family may have different needs or unavoidable expenses.

The means test does not necessarily adjust dollar for dollar to match the actual circumstances of each household.

The problem is not that reasonable standards should never be used. A standardized system has administrative advantages. The problem is that a standardized allowance cannot perfectly reflect the financial pressures faced by every family.

5. Michigan Car Insurance, Gasoline, and the Cost of Getting to Work

If you live in Michigan, you already know that owning a vehicle involves much more than making a monthly payment.

There is automobile insurance, gasoline, maintenance, tires, repairs, registration, and the occasional unexpected breakdown. Michigan’s no-fault auto insurance system can make insurance a particularly significant expense, depending on the driver, vehicle, coverage, and location.

And for many Michigan residents, driving is not optional.

Public transportation may not provide a practical way to get to work in the suburbs or rural areas. Someone who works in one city and lives in another may have no realistic alternative to driving. A worker may also need a vehicle to transport children, care for an elderly parent, or attend medical appointments.

The means test includes standardized vehicle operating expense allowances, with applicable rules governing how expenses are calculated. But the standardized allowance may not match what an individual actually spends.

Gasoline prices fluctuate. Insurance premiums vary. Older vehicles can require frequent repairs, while newer vehicles can bring higher insurance costs and loan payments.

A person driving an older, paid-off vehicle may be trying to minimize expenses but still face a significant monthly transportation bill.

The means test can have difficulty distinguishing between someone who has made expensive choices and someone who is already driving an older vehicle because it is the only practical way to get by.

6. Child Care and Other Necessary Family Expenses

Families with young children face another financial challenge: child care.

For a parent who must work, child care may be an unavoidable expense rather than a discretionary choice. Depending on the child’s age, the number of children, and the family’s location, the cost can consume a substantial portion of a paycheck.

The means test has provisions addressing certain child-care expenses, but those provisions have specific requirements. Not every family expense qualifies simply because it is necessary.

Other expenses can also put pressure on a family’s budget, including support obligations, certain education-related expenses, and costs associated with caring for an elderly, chronically ill, or disabled household member. Some of these expenses may receive special treatment under the law; others may be limited or excluded from the calculation.

This is another example of the difference between a real-world household budget and a statutory formula.

A family can be doing everything it reasonably can to stay afloat and still have expenses that do not fit neatly within the categories permitted by the means test.

7. Credit Card Minimum Payments and the Debt Trap

There is an additional irony in how people get into financial trouble.

Someone who has accumulated substantial credit card debt may be paying hundreds of dollars each month in minimum payments. A significant portion of those payments may go toward interest rather than reducing the principal.

When that person falls behind, late fees and higher interest rates can make the situation worse.

Yet the means test does not generally treat ordinary credit card minimum payments as a deductible expense in the same way it treats qualifying secured debt payments or other specifically permitted deductions.

That makes sense to a degree: the means test is designed in part to determine whether someone can repay unsecured creditors, so allowing every existing credit card payment as a deduction could defeat its purpose.

Nevertheless, the result can be difficult for a debtor to understand. They may be making substantial monthly payments on unsecured debt, struggling to afford basic necessities, and still be told that the statutory calculation suggests they have the ability to repay creditors.

This is one reason why a means-test result should never be confused with a complete picture of a person’s financial health.

The Bigger Problem: The Cost of Living Has Changed

The examples above illustrate individual shortcomings, but the broader issue is more fundamental.

The means test relies on statutory rules, median-income figures, and expense standards. Some figures are updated periodically, and the formula does account for several important expenses. But it cannot automatically adjust to every change in a person’s circumstances or every increase in the cost of living.

Think about the expenses a typical Michigan household must manage today:

• Housing: Rent, mortgage payments, property taxes, homeowners insurance, and utilities.
• Transportation: Car payments, gasoline, Michigan auto insurance, repairs, and maintenance.
• Food: Groceries, school lunches, and basic household supplies.
• Health care: Insurance premiums, prescriptions, deductibles, and medical bills.
• Family obligations: Child care, dependent care, and support payments.
• Debt: Credit card balances, personal loans, medical debt, and collection accounts.

When these expenses increase, a household may have less money available each month even if its income has not changed.

And when wages rise, that does not necessarily mean a family is better off. A raise can be swallowed up by higher rent, insurance premiums, grocery bills, and the cost of maintaining a vehicle.

The means test attempts to provide an objective way of evaluating repayment ability. But an objective formula is not necessarily the same thing as an accurate reflection of every person’s ability to pay.

A household can appear to have disposable income under a formula while living paycheck to paycheck in reality.

Does Failing the Means Test Mean You Cannot File Chapter 7?

No. This is an important point.

The means test is a major part of many Chapter 7 eligibility analyses, but it is not the only consideration in every case.

If your income is above the applicable median, you may still qualify for Chapter 7 after the permitted deductions are calculated. If the statutory calculation creates a presumption of abuse, there may be additional legal issues to evaluate, including whether any recognized special circumstances apply.

There are also situations in which the means test does not apply in the usual way, depending on the nature of the debts and other statutory requirements.

And if Chapter 7 is not available or is not the best option, Chapter 13 bankruptcy may provide a way to reorganize debts and address financial problems over time.

The important thing is not to assume that you are disqualified simply because you earn too much, own a vehicle, or have been told that you fail the means test.

The facts matter. The applicable deductions matter. The timing of the filing can matter. And the legal analysis matters.

Why Experienced Bankruptcy Counsel Matters

I have represented more than 25,000 people during my 35-year bankruptcy career, and I have learned that two households with similar incomes can have very different financial realities.

One may have a paid-off vehicle but high medical expenses. Another may have a car payment, high housing costs, and significant child-care expenses. A third may have recently experienced a reduction in income that is not fully apparent from looking at a single paycheck.

The means test must be completed according to the law. It cannot simply be replaced with a lawyer’s opinion that a client is struggling financially.

But applying the law correctly requires more than looking at gross income and guessing whether someone qualifies. It means reviewing the relevant income period, household size, secured debt obligations, allowable expenses, and any special circumstances that may be relevant.

It also means considering whether Chapter 7, Chapter 13, or another course of action is appropriate for the client’s circumstances.

A person should not assume that a paid-off car, a modest lifestyle, or a seemingly high income automatically prevents them from filing Chapter 7 bankruptcy.

Likewise, a person with a large car payment should not assume that the payment guarantees eligibility.

Every case is different.

Final Thoughts

The Chapter 7 means test was designed to establish a more uniform method of determining whether debtors have the ability to repay their creditors. That is a legitimate goal.

However, the formula can produce results that seem unfair, particularly when it treats certain expenses more favorably than the financial choices that helped someone avoid those expenses in the first place.

A person who drives an older, paid-off car may be more financially responsible than someone making a large monthly car payment. Yet the second person may receive a more favorable deduction for the qualifying secured debt payment.

That is just one example of the difference between a statutory formula and the realities of everyday life.

If you are struggling with credit card debt, medical bills, collection lawsuits, or wage garnishments in Michigan, do not assume that the means test automatically rules out Chapter 7. A careful review of your finances may reveal options you did not realize were available.

I offer free bankruptcy consultations to discuss your circumstances and explain your options. You can call my office at 313-962-4656 to get started.

The goal is not to find a way around the law. It is to make sure the law is applied correctly to your actual circumstances, so you can make an informed decision about your financial future.