Social Security And The Means Test

11 Jan Social Security And The Means Test

The first step in a bankruptcy filing is to determine the debtor’s income in relation to the Current Monthly Income for your state. Assuming the debtor is above that, the more complicated Means Test must be performed.

The outcome of that test will determine either if the debtor qualifies for a Chapter 7 bankruptcy or it will calculate the amount of money the debtor will need to pay to unsecured creditors in a Chapter 13 bankruptcy.

A controversy has arisen as to how social security income is treated in that test. The bankruptcy code says specifically that social security income need not be included in the calculation of Current Monthly Income. And therefore, it isn’t a factor in determining how much a chapter 13 debtor should pay his or her unsecured creditors. Or is it?

A couple of courts have said that the calculation of how much to pay in a Chapter 13 plan should include social security income or else it isn’t the “best efforts” of the debtor to repay the creditors (language used in the bankruptcy code and by Judge Kagan in a recent Supreme Court case regarding the Means Test).

Several courts, however, have ruled the other way: specifically saying that it isn’t bad faith of the debtor to exclude such income from the calculations. Sooner or later, the split in court on this issue will get to the Supreme Court and they will, once again, be faced with whether or not to follow the specific language of the bankruptcy act as passed by Congress or to apply logic and consistency. After all, it seems absurd to include Social Security in determining how much to repay one’s creditors but not include a private retirement account.

I fear that the Supreme Court, when faced with this issue, will find that social security must be included in the calculation. Yeech.


image credit: The Survival Woman

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Douglas Jacobs is a California bankruptcy attorney and partner in the Chico law firm of Jacobs, Anderson, Potter & Chaplin. Since 1988, Mr. Jacobs has taught Constitutional law and Debtor-Creditor/Bankruptcy law at the Cal Northern School of Law. He has served as Dean of Students since 1994. He is a frequent lecturer on the subject of consumer bankruptcy law, and has spoken at both state and national levels.
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