The bankruptcy means test was the centerpiece of the 2005 BAPCPA amendments to the bankruptcy code. Anything that congress did those years carried an expiration date. Think back to the Patriot Act, remember when we had rights? How about the Tax Cut? You will remember that in 2011 when it goes away. As a gift to their buddies in the bank and credit card industries, the bankruptcy means test will be with us until the law is repealed. The prospects for this appear dim since health care and immigration now have center stage.
What Is The Bankruptcy Means Test?
Congress with the help of their credit card buddies decided to set a standard that if you failed it chapter 7 bankruptcy would be considered to be an “abusive” filing. It was an effort to keep well off people from having their debts eliminated in bankruptcy. The good new is that you will find out how “well off” you are! The first part of the bankruptcy means test is the income analysis. It averages your household income from all sources except for social security over the past 6 months. This even includes contributions from others to your household, like from a roommate. Form 22 takes this 6 month average and then annualizes it to come up with income for the past year. This sum is then compared with the median income for your state of residence for a family of your size. These numbers come from the IRS. If your income is lower than the State median income all is well, you can file a chapter 7 bankruptcy, or if you intend to file a chapter 13 you can have a minimum 3 year plan. If you are over the median income then you have to complete the rest of the form. If you are over then your chapter 13 case must be for a minimum of 5 years.
That’s not all. The rest of the form crafts a neat little way to compute your “allowable expenses” to determine if your circumstances create a presumption of abuse. The expenses are largely a joke. They do not use your actual expenses like you entered in Schedule J. The allowed expenses are again from the IRS. These are the numbers they allow tax cheats and felons to use in determining how much they can keep before Uncle Sam cashes in. You do get almost full credit for any secured, and tax debts you owe.
Ultimately the bankruptcy means test gives a result which is your “disposable income.” Too big and your filing is presumed to be abusive. Low or negative and there is no presumption of abuse and you can file a chapter 7.
In a Cleveland chapter 13 case the disposable income result is also the amount each month that the Chapter 13 Trustee requires you to pay to unsecured creditors each month. Remember, this amount is arrived at not with your actual expenses, but with punitive IRS averages. Hardly seems fair, unless you are a credit card company, does it? One big difference between chapter 13 and Chapter 7 bankruptcy means test. The chapter 13 test also allows you to subtract your qualified retirement contributions from disposable income. This includes 410k contributions and 401k loan payments. Chapter 7 people are not allowed to pay into retirement.
What Does Abusive Mean?
The office of the United States Trustee is charged with enforcement of the means test. They go over each case. If they determine you case is abusive (after you file it). They will:
- Request clarification
- Suggest amendments
- Move to Dismiss your case for abuse
I have seen dismissal motions based on the fact that someone decided that your car is too nice for someone filing chapter 7. Other times it is just based on the numbers. The result is either you fight and hope to stay in a chapter 7 case, or you amend to a chapter 13, and the motion will be dismissed.
The bankruptcy means test is very complicated. It is one of the reasons that you need an experienced bankruptcy lawyer on your side. Truly is it one of the major factors that caused bankruptcy attorney fees to increase following BAPCPA. Many times I have had clients come to me because less capable attorneys looked at their case and decided that they could not pass the means test. They did not do chapter 13 cases and sent the client on. After a full analysis and completion of the bankruptcy means test nearly all of them qualified for a chapter 7.
Picture by iStockPhoto.com.