Bankruptcy, Over-Median Income, and the Means Test

The bankruptcy reforms of October, 2005 (BAPCPA; Bankruptcy Abuse Prevention and Consumer Protection Act) created a three-part Means Test. First, each debtor’s income for the six full months before filing (including a spouse’s income unless separated) is compared against the median income for the debtor’s household size in the home state. Second, an above-median income debtor’s income is tested against IRS allowances. Third, any excess is examined against the amount of debt this excess could pay over five years. A Chapter 7 debtor can be forced into a five year Chapter 13 repayment plan if enough debt can be repaid, and in Chapter 13 an above-median income debtor’s surplus, after subtracting the IRS allowances, is what must be paid for five years.

The IRS uses these allowances for negotiating payments on tax debts, and each official has discretion in applying the allowances to any given situation, or not. Congress’ BAPCPA requires strict application of these standards for all above-median income debtors. This means that one receives more generous treatment for owing taxes than for owing credit cards.

The United States Trustee reports that 10% of the bankruptcy filers are above-median income, and less than 10% of them - or less than 1% overall - have enough income after applying the Means Test itself to be forced into a Chapter 13 repayment plan. All this worry and expense for less than 1% of the filers !!!!