It used to be that there were two main exceptions to having to pass the “means test” when filing for bankruptcy under the new laws enacted in October, 2005. Recently, a third large exception was added.
Prior to October, 2005, filing for bankruptcy did not require form “b22″ or taking a means test. Instead of this artificial test, discretion was left to the bankruptcy judges to decide whether there was an abuse of the bankruptcy code. Typically, such an abuse would be found if debtor filed bankruptcy and clearly had the ability to pay back a substantial portion of his claims within a three to five year period.
When Congress passed the means test, it intended to take much of this discretion away from the bankruptcy judges with a bright line formula called the means test. This test compared artificial income (from the previous 6 months) with artificial expenses (from an IRS tax table). A debtor either passed or failed, and the system is easily manipulated by simply timing the receipt of income in the previous 6 months or playing with certain expenses and family sizes. Nevertheless, there were previously two primary exceptions to the means test. Social Security and Non-Consumer Debt.
Social Security income: Means testing does not consider social security as income. Accordingly, someone with $1200.00 per month social security income will pass the means test even if expenses are only $600 and $600 is left over to pay creditors on the means test.
Non-Consumer Debt: If a debtor has primarily non-consumer debt, then means testing does not apply. Accordingly, someone making $100,000 per month with primarily business debt, still qualifies for Chapter 7 relief and discharge. For more analysis of what is consumer and non-consumer debt, please click this link.
So what is the new Third Exception to Means Testing? Its the National Guard and Reservists Relief Debt Act of 2008. This third exception went into effect on December 19, 2008, and applies to certain members of the National Guard and reserve components of the Armed Forces.
National Guard and Reservists Relief Debt Act of 2008, Pub.L. No. 110-438: If you are a National Guard Member or Armed Forces Reserve, then you will be temporarily excluded from the means test for entire time you are on active duty and 540 days thereafter, provided you serve at least 90 days. If your duty is less than 90 days, you do not qualify. If you are simply active military duty, you do not qualify. Why the military was subordinated below national guard or reserve status and still must take the means test is a mystery.
Nevertheless, the bright line means test designed to eliminate judicial discretion to bankruptcy abuses is slowly being eroded as expected. Moreover, even if you need to take the means test, you can probably rest assured that you most likely will pass in any event with the help of a competant attorney, as very few debtors are precluded from filing solely from means testing.
Written by Michael G. Doan
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