Means Test Does Not Apply to Individual Chapter 11 Debtors

30 Nov Means Test Does Not Apply to Individual Chapter 11 Debtors

One of the many advantages for an individual choosing to file a Chapter 11 bankruptcy over a Chapter 13 Bankruptcy is that the 707(b) means test is not incorporated into the calculation of disposable income for individual Chapter 11 debtors.

Indisputably, the greatest change to the bankruptcy code in 2005 was the addition of the Means Test. The test is required by bankruptcy code section 1325(b)(3) and is used to determine the disposable income of a Chapter 13 debtor who is above the median income. The Means Test is nicknamed the “Mean Test” because it usually inflates a Chapter 13 debtor’s real disposable income. A better indicator is and has always been comparing bankruptcy schedules I and J, which utilize actual data in determining a debtor’s true disposable income.

The Means Test is inapplicable in Chapter 11.Bankruptcy Code Section 1129(a)(15) refers to section 1325(b)(2) for the calculation of disposable income for individuals filing Chapter 11, but 1325(b)(2) merely requires expenses to be “reasonably necessary” and does not incorporate the section 707(b) means test. That test is brought into chapter 13 by section 1325(b)(3), which says that the “reasonably necessary” determination in (b)(2) for above-median income debtors shall be based on the means test.

Accordingly, in Chapter 11 cases, a debtor’s “projected disposable income” under section 1129(a)(15) is calculated by the bankruptcy judge who has the benefit of knowing what expenses are reasonably necessary for the support of the debtor and his or her dependents. This results in the individual Chapter 11 debtor paying back to unsecured creditors only that amount he can truly afford.

Just one more reason for individuals to choose Chapter 11 over Chapter 13.

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Chip Parker is the managing partner of Parker & DuFresne, P.A., where he represents Northeast Florida businesses and consumers facing bankruptcy, and homeowners facing foreclosure. His firm files more homeowners in the Mortgage Modification Mediation Program than any other law firm in Northeast Florida. Parker is the recipient of Jacksonville Area Legal Aid's prestigious Award for Outstanding Pro Bono Service. Mr. Parker is an active member of the National Association of Consumer Bankruptcy Attorneys and National Association of Consumer Advocates.
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