28 Feb 3 Steps To A Fresh Start, Courtesy Of The Means Test
The bankruptcy means test is widely thought to involve just looking at the amount of the debtor’s income. In fact, it’s a three part test; you could say that the first part is true or false; the second part multiple choice; and the third part is essay. Most people don’t have to go beyond the first or second step to qualify for bankruptcy. Means test map.
The rallying cry in Congress for bankruptcy reform was “needs-based relief”: only those who really needed bankruptcy would be permitted to file Chapter 7. The filter imposed for finding the needy, and tossing out the rest, was the means test.
The true/false part, compares the debtor and his spouse’s income to the median income for his state of residence for families of the same size as the debtor’s household. Note that we are comparing apples to oranges: we determine how many people in the debtor’s household (which may include extended family, adult children living at home, exchange students, etc.) and compare the debtor’s income to the income of families of the same size as the debtor’s household. If the household income is below the median, they pass the test and qualify. If their income exceeds the median, we go to part two.
The second part, the multiple choice element, computes the family’s allowable expenses using a combination of fixed allowances from the IRS Collection standards for some categories, and the debtor’s actual expenses for other categories. Included in the permissible expenses are the payments that come due over the next five years for mortgage, property tax and car payments. Only if there is a positive number in excess of $192 on the bottom line does the presumption of “abuse” arise.
In the third step, the essay part, the debtor gets an opportunity to rebut that presumption by presenting special circumstances that make the case non-abusive. If the trustee is convinced, the debtor moves forward with bankruptcy. If not, the judge will hear the evidence and make a ruling.
The number of prospective Chapter 7 bankruptcy denied relief has turned out to be far smaller than the proponents of the test imagined . The means test may well be a paper tiger.
Image courtesy of Casey Serin
Cathy Moran, Esq.
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