Three Biggest Exceptions to Means Testing in Bankruptcy

04 Jan Three Biggest Exceptions to Means Testing in Bankruptcy

Most people who file for bankruptcy need to go through the means test to find out if they quality for Chapter 7 or need to file for Chapter 13. There are, however, some exceptions to this rule.

In the old days, discretion was left to the bankruptcy judges to decide whether you could file for Chapter 7 bankruptcy or if there was an abuse of the Bankruptcy Code. Typically, such abuse would be found if you filed bankruptcy and clearly had the ability to pay back a substantial portion of the debts over a three to five year period.

Bankruptcy judges no longer have such latitude, being stuck with a bright line formula called the means test. This test compares artificial income (from the previous 6 months) with artificial expenses (from an IRS tax table). You either pass or fail, 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 are a few exceptions exceptions to the means test.

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.

National Guard and Reservists Relief Debt Act of 2008: 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.

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