Bankruptcy Basics: What Is A “Means Test” In Chapter 7?

08 Sep Bankruptcy Basics: What Is A “Means Test” In Chapter 7?

Nope, a “means test” is not a test of how mean can you be anyway.

Congress passed the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 in October 2005 and mandated that a “means test” be used to determine whether or not a debtor is entitled to a Chapter 7 discharge or whether the debtor should be in a reorganization plan in a Chapter 13 (or maybe even Chapter 11).

The basic purpose of the “means test” is to compare “current” monthly income and expenses. If the income is more than the expenses by more than approximately $100, the person could be “abusing” the bankruptcy process by filing a Chapter 7. The United States Trustee would then file a Motion to Dismiss the Chapter 7 for Substantial Abuse (which really means “we don’t think you belong in Chapter 7-land, move to Chapter 13-land).
To get to the “means test” requirement, a debtor has to make more than the annualized median income for their household size in their state. (Confused yet? Wait, there’s more). The median income figures are determined by the U.S. Census (not the Bankruptcy Court, not the U.S. Trustee’s Office). In order to calculate income for “means testing”, the average income for the six months immediately prior to the filing of the bankruptcy petition is used as opposed to actual or projected income at the time of filing (that means each month’s income is added and divided by 6, so when a debtor has not worked or suddenly got a great paying job, the average income would bear no resemblance to reality). Some types of income, like social security, don’t count. (and that is real income; remember, the “current” monthly income bears no resemblance to reality).

And the expenses are determined by the IRS reasonable expenses standards, not the actual expenses (so the expenses bear no resemblance to reality).

If you are not confused still, wait, there’s more. After subtracting the IRS reasonable standard expenses and other allowable expenses from this “current” monthly ncome, the resulting number is called “disposable monthly income” (now remember, this bears no resemblance to reality). If the monthly “disposable” income is less than $109.58, VOILA’!!!!! no presumption of abuse will exist.

If the monthly disposable income is between $109.58 and $182.50, a presumption of abuse will arise only if the debtor can pay at least 25% of the non-priority unsecured debts over five years (HUH??) On the other hand, if monthly disposable income is greater than $182.50, a presumption of abuse will exist regardless of the amount of the debtor ‘s non-priority unsecured debts (what are non-priority unsecured debts? Why, credit cards are!!! And the credit card lobbyists were the primary pushers of the Bankruptcy Act of 2005).

For those of you paying attention thus far, the Census Bureau is involved, the IRS is involved, the U. S. Trustee’s Office is involved, and then there is the bankruptcy court–all looking at each other and adjusting the figures at set intervals under the Bankruptcy Act of 2005.

So, the debtor “flunks” the means test. Does this mean the debtor cannot file a Chapter 7? No, if there are “special circumstances”, the debtor can rebut the presumption of abuse. If the debtor “flunks” the means test, usually Chapter 13 is the best option with the least amount of stress.

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I'm a consumer protection lawyer in Oregon, working with people in Klamath; Lake; Jackson; Josephine; Curry; and Deschutes County. I speak regularly on bankruptcy and consumer protection issues nationwide.

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