13 May Don’t Be So Quick to Dismiss the Relevance of Means Test Numbers
Much has been written on this blog about the two different types of budgets required in many bankruptcy filings. If your average income – calculated by looking at your household earnings for the six months prior to the month of filing – is over the “median income” for a similarly sized family in your State, you must complete a “means test” budget which uses monthly expense figures provided by our friends at the IRS to determine if you have sufficient disposable income to file a Chapter 13.
Bankruptcy debtors and lawyers have long decried the means test as an indicia of capacity to pay, since your income over the past six months may have nothing to do with your income going forward and because IRS derived budget figures may have nothing to do with your reality. As such, creative lawyers have argued that the means test should not be viewed as a rigid bright line test and, in a few jurisdictions in situations where a debtor’s financial circumstances have changed dramatically in the weeks before filing, some judges have been receptive to these arguments.
In these courts, under limited circumstances, a debtor with “disposable income” per the means test may still be able to file Chapter 7 or a Chapter 13 with a monthly payment inconsistent with the means test. However, in most cases, the bottom line number generated by the means test will be used to determine whether Chapter 7 is possible or, if a Chapter is mandated, what payout unsecured creditors in a Chapter 13 can expect.
I think that debtors and debtors attorneys should consider a more expansive use of means test numbers. In my experience, trustees in bankruptcy, and by extension, judges in bankruptcy, are very sensitive to inconsistencies in the financial data provided by debtors.
When BAPCPA was announced, I was struck by the new requirements for document production. Not only was financial history still part of the Statement of Financial Affairs, but tax returns were now required. Pay stubs would have to be produced. Post filing audits were added to the Code. Gone were the days when a good faith estimate of past and future finances would be sufficient. Bankruptcy now required audit like accuracy and woe to the debtor or debtor’s lawyer who was unable to produce this documentation.
When I work on a means test case, I always look at the budget allocations in the means test and compare them to the real world expense numbers on Schedule J. I look at the median income average and compare it to the actual and current pay information I use on Schedule I. If there are significant disparities, especially in the case of self-employed debtors, a red flag goes up. If my client does not have accurate and comprehensive records, I would be reluctant to accept and file a case. Even with records, I prepare my client for the likelihood of a U.S. Trustee investigation and possible deposition.
Although the means test can seem like a random calculation divorced from the reality of the debtor’s actual budget I think that trustees and judges view the means test as part of the whole picture of a debtor’s financial situation and inconsistencies within that picture will trigger questions.
Jonathan Ginsberg, Esq.
Latest posts by Jonathan Ginsberg, Esq. (see all)
- How Cognitive Biases Can Drive You Into Bankruptcy - April 9, 2018
- Are We Seeing a Return to Debtors’ Prisons? - March 6, 2018
- Why Surrendering Your Car or House in a Chapter 13 May Create Unexpected Problems - February 6, 2018
- How Bankruptcy Exemptions Work - November 6, 2017
- Yes You Can Refile Your Chapter 13 Case, But Should You? - September 6, 2017