Bankruptcy Means Test

TRADITIONAL BASIS FOR FINDING ABUSE WITHOUT THE BANKRUPTCY MEANS TEST

A chapter 7 case filed by a person with primarily CONSUMER DEBTS may be dismissed (or converted to a Chapter 13 case if the debtor agrees) where the court finds that the granting of relief under chapter 7 would be an abuse of the law. The standard that courts use to decide this (abuse) is whether the debtor can afford to pay back a significant amount of his or her debts over time. So courts will examine the debtor’s ability to pay all or a substantial portion of debt (i.e., in a Chapter 13 case) over a reasonable period of time as an alternative to Chapter 7.

Courts will consider the likely result of a hypothetical Chapter 13 case for the debtor in order to decide whether an abuse of Chapter 7 is likely to occur. However, the “new” bankruptcy law of 2005 has added a whole new dimension to this process. The amended law provides that in certain instances, the court will presume that abuse exits where the debtor is subject to and fails what has become known as a MEANS TEST.

“PRESUMPTION OF ABUSE” AND THE “BANKRUPTCY MEANS TEST”

The new bankruptcy law of 2005 has established a mechanical test or formula for deciding when this “presumption of abuse” exists in a Chapter 7 filing. The actual rules are extremely complex and can be found in Bankruptcy Code §707(b). The following description is something of an over simplification but will help you to understand the main elements of the MEANS TEST and how it operates:

Income tables establish the MEDIAN INCOME for your case. First, all debtors are divided into two categories:Those with annual income above the MEDIAN INCOME level for a similar household in the same state, and those with below the MEDIAN INCOME level for a similar household in the same state where the debtor resides. To see the actual tables for these income levels, go to the U.S. Department of Justice website.

BELOW MEDIAN INCOME. Debtors who have below this MEDIAN INCOME in their state/area are subject to an"abuse dismissal standard"]similar to what has been used traditionally (see above). That is, the court will examine the debtor’s income and living expenses to see if the debtor could actually afford to pay all or a substantial portion of their debt over a reasonable period of time. In addition, the court shall consider if the bankruptcy case was filed in “bad faith” and also consider if the “totality of the circumstances of the debtor’s financial situation demonstrates abuse.”

ABOVE MEDIAN INCOME. Debtors who have income above the MEDIAN INCOME level for their state/area are subjected to a MEANS TEST that is "a formula." It is partly based on actual living expenses and partially based on hypothetical living expenses. As a result, it can be arbitrary and unfair. But if the MEANS TEST is applied to you and you don’t “pass,” then you are guilty of PRESUMED ABUSE. Without special circumstances, you won’t be allowed to file Chapter 7. We describe how it works below.[/expand]

JEFF’S TIP: “Abuse” sounds bad, but it’s good to be earning money! We are very pleased when our clients are earning good money, especially after periods of extended unemployment or similar problems. If you are above the median income, don’t take chances with the rules explained below—see a qualified attorney right away! If this is your situation, don’t fret about it. Talk to us as soon as possible and we will help you understand how the rules affect you. And remember, the rules look at your income in the last 6 months, so you should talk to a lawyer as soon as possible to see how the rules will affect your case.

HOW THE BANKRUPTCY MEANS TEST WORKS

Bankruptcy Means TestWe start with your CURRENT MONTHLY INCOME (explained below). Then we subtract a combination of real and hypothetical living expenses. This is supposed to tell you and your attorneys if you have enough PROJECTED DISPOSABLE INCOME to pay some of your debts."Click here for the details:"

Presumption of abuse is automatic for debtors with above MEDIAN INCOME if they have enough PROJECTED DISPOSABLE INCOME to pay general unsecured creditors:

●    At least $11,725 over a period of 60 months;

●    At least 25% of these general unsecured debts if the projected disposable income totals between $7,025 and $11,725 over a period of 60 months;

●    And if the PROJECTED DISPOSABLE INCOME is not enough to pay at least $7,025 over a 60 month period, there is no presumption of abuse – However, the debtor may be subject to the other provisions allowing dismissal if the bankruptcy case was filed in “bad faith” and also considering if the “totality of the circumstances of the debtor’s financial situation demonstrates abuse.”

CURRENT MONTHLY INCOME under the MEANS TEST refers to all of the debtor’s income received during the last six calendar months ending with the month prior to the bankruptcy filing. But note that Social Security and income of the debtor’s spouse (if it is not shared with the debtor) are excluded from the definition of current monthly income. The PROJECTED DISPOSABLE INCOME is what the debtor has left over after subtracting the required combination of real and hypothetical living expenses from the debtor’s CURRENT MONTHLY INCOME (see below).

The MEANS TEST employs a combination of real and hypothetical living expenses to determine ability to pay. If ability to pay is found, then the bankruptcy case is presumed to be an abuse. The hypothetical expenses are taken from the expense standards that are used by the IRS to determine the size of monthly payments that it will collect from delinquent tax payers. To see this in detail, go to the U.S. Department of Justice website where you will find the national and local expense standards that will apply to you.[/expand]

LEON’S TIP:  Over time the courts will probably issue many rulings that define the term “special circumstances” (discussed below) that would allow you to file Chapter 7 even if you fail the BANKRUPTCY MEANS TEST. A sudden job loss or other major income disruption—such as one that comes from a serious disease or disability—may be sufficient to establish inability to pay (see more below). Of course, the debtor will still have to show convincing evidence that the disruption to income or the extra expense is likely to persist for the foreseeable future and was not created as a bad faith tactic (such as deliberately quitting a job).

SPECIAL CIRCUMSTANCES MAY BE USED TO GET RELIEF FROM THE BANKRUPTCY MEANS TEST

A presumption of abuse finding may be overcome by demonstrating “special circumstances.” Special circumstances is defined in the law as “a serious medical condition or a call to active duty in the Armed Forces, to the extent such special circumstances that justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.” In order to establish special circumstances the debtor must provide documentation and a detailed explanation that makes the claimed extra expenses or adjustment of income necessary and reasonable.

LEON’S TIP: But the net income portion of the means test may still apply. Of course, to get the benefit of the “special circumstances” exception, you’d still have to show that you won’t have enough left over income going forward under the BANKRUPTCY MEANS TEST despite your circumstances. So the additional expenses or adjustments to income claimed by the debtor under this section must establish that the debtor’s projected disposable income does not leave enough money to pay the general creditors at least $11,725 over a period of 60 months or at least 25% of such debts if the projected disposable income is between $7,025 and $11,725. If the projected disposable income is less than $7,025 over the next 60 months, the presumption of abuse will be rebutted.

GOT A QUESTION? IT'S OK TO CALL AND ASK US. ASK FOR LEON OR JEFF. THE TOLL FREE BANKRUPTCY HOTLINE IS 800-477-3111.GOT A QUESTION? IT’S OK TO CALL AND ASK US. ASK FOR LEON OR JEFF. THE TOLL FREE BANKRUPTCY HOTLINE IS 800-477-3111.

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