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Attorney Seminar: Means Test
Means Test Seminar
Jeffrey Solomon has written and presented seminar materials for continuing education credit to attorneys about the new bankruptcy law. The materials below discuss changes in the bankruptcy law concerning the means test and eligibility to file a 7.
CHAPTER 7 or CHAPTER 13 ELIGIBILITY: WHAT IS THE MEANS TEST?
The underlying theory behind BAPCPA is that debtors who could pay their debts, or at least a portion of their debts, were abusing the system by eliminating all of their debts in a Chapter 7. BAPCPA set up a system to analyze the debtor's income and expenses in a structured way to determine eligibility for Chapter 7. The overwhelming majority of debtors who could file chapter 7 bankruptcy under prior law can still file chapter 7. All bankruptcy practitioners have had to learn the "means test". The means test is used to create a presumption whether the debtor may file a Chapter 7 petition.
B. MEDIAN INCOME
If the assisted person (consumer debtor under the new law) is below the median income, there is no presumption of abuse. There is a presumption that the debtor can file a chapter 7. The vast majority of individuals who need to file for bankruptcy are under the median income.
Median income is obtained from the most recent US Census figures of the state for family income. The median income applicable after March 15, 2011 is as follows:
For each additional person, add $ 7,500.00.
How do we determine the number of persons in the household? Sec.707B(6) and B(7) provide that it is necessary to examine "in the case of a debtor in a household of 2, 3, or 4 individuals, the highest median family income of the applicable State for a family of 4 or fewer individuals." The statutory language raises several issues.
The statute provides that we must use the number in the "household" to determine the median "family" income. What constitutes the "household"? Debtor and girlfriend? Girlfriend's children? Two or three roommates sharing the rent? Is it based on "heads on beds" and the number the US Census would count? Is it based on the number of dependents on tax returns? Is the test based on "an economic unit"? The larger the household, the higher the median income that can be used. However, under current monthly income below, to what extent must the other household members' income be used?
C. CURRENT MONTHLY INCOME (CMI)
The income is not based on annual income. BAPCPA defines the income to be used for the means test as follows
(10A) The term "current monthly income-
(A) means the average monthly income from all sources that the debtor receives (or in a joint case the debtor and the debtor's spouse receive) without regard to whether such income is taxable income, derived on the 6-month period ending on:
(i) the last day of the calendar month immediately preceding the date of the commencement of the case if the debtor files the schedule of current income required by section 521(a)(1)(B)(ii); or
(ii) the date on which current income is determined by the court for purposes of this title if the debtor does not file the schedule of current income required by section 521(a)(1)(B)(ii); and
(B) included any amount paid by any entity other than the debtor (or in a joint case, the debtor or debtor's spouse), on a regular basis for the household expenses of the debtor or the debtor's dependents (and in a joint case the debtor's spouse if not otherwise a dependent), but excludes benefits Received under the Social Security Act, payments to victims of war crimes or crimes against humanity on account of their status as victims of such crimes, and payments to victims of international terrorism (as defined in Section 2331 of Title 18) or domestic terrorism (as defined in Section 2331 of title 18) on account of their status as victims of such terrorism.
Current Monthly Income is often described as being neither current nor monthly nor income. It is not based on actual current monthly income. Income does not include income based on the Social Security Act, but pension income is included. There are issues as to what must be considered income for means test purposes.(Consider an IRA withdrawal or a sale of a vehicle). Consider planning issues that affect the timing of the filing, such as avoiding overtime and seasonal income. Consider a case in which the debtor only worked a portion of the six months prior to filing bankruptcy.
D. MEANS TEST, DISMISSAL AND CHAPTER 13
For a thorough discussion of the means test, see the article by U. S. Bankruptcy Judge Eugene R. Wedoff, 79 Am. Bankr. L. J. 231,Means Testing in the New 707(b), (National Conference of Bankruptcy Judges)(Spring 2005).
Debtors who are substantially over the median income might be eligible for a chapter 7.
MYTH: IF DEBTOR IS ABOVE MEDIAN INCOME, THE DEBTOR CANNOT FILE CHAPTER 7.
If the debtor is over the median income, then the means test provides for deductions based on numerous categories. Some are based on IRS allowed budgets. Some are based on allowed actual expenses, such as secured debt, child support, alimony and health insurance. In South Florida with high mortgage payments, a high income debtor can often qualify for a Chapter 7. But if there is a presumption of abuse, then the issue of dismissal or chapter 13 arises.
1. Sec. 707 provides the basis for dismissal of a Chapter 7 case.
2. Sec. 707(a) provides for dismissal for cause as under prior law.
3. Sec. 707(b) provides for dismissal for abuse and has several subparts. Sec. 707(b)(1) provides for dismissal for abuse of the provisions of the bankruptcy code. In Sec. 707(b)(2), abuse is presumed if the debtor fails the means test. Any interested party can file motion for dismissal under these two subsections.
4. If below median income, it is not necessary to proceed with the balance of the Means Test. If over median income, the debtor may take certain credits against the income. After completing the means test, the results show if there is any disposable income to pay unsecured creditors.
5. If the net monthly income is under $100.00 per month, there is no presumption of abuse. If the net monthly income is over $166.00 per month, abuse is presumed. If the net monthly income is between the above two figures, abuse is presumed if the amount times 60(months) would pay 25% to unsecured creditors. Presumption of abuse can be rebutted by special circumstances pursuant to Sec.707b(2)(B). (Due to inflation adjustments, the amounts have increased to $109.59 and $182.50 per month.)
6. Sec. 707(b)(3) provides for dismissal if the granting of relief would be an abuse of the bankruptcy law. If the means tests is passed, then the abuse can be based on whether the petition was filed in bad faith or under the totality of the circumstances the debtor's financial situation demonstrates abuse. Under what circumstances may the case be dismissed (or must debtor convert to Chapter 13) if the means test shows no abuse and no excess income, but the actual current income and expenses, with consideration of expected changes in the budget, shows disposable income available to pay unsecured creditors?
7. Unresolved Issues: Numerous issues are being litigated.
a. One set of issues concerning the means test pertains to how to make the calculations. These issues could be the subject of an entire seminar.
b. A separate question involves the difference between the disposable income based on the means test compared to the actual current budget. This is the issue discussed in No. 6 above for dismissal under 707(b)(3). The means test is largely an artificial test based on the past six months, and the Schedule I and J budget is supposedly an accurate current and forward looking budget. Does the means test create a bright line test as to how much, if anything, must be paid to unsecured creditors in a Chapter 13, or does the concept of "projected disposable income" require an analysis of future expected income and expenses?
c. What special circumstances or a change in circumstances permit a debtor to pay less during the term of a chapter 13 than the means test requires, or conversely, would permit a Chapter 13 trustee to seek an increase in the plan payments?
d. Note that there is a major issue as to the required length of a Chapter 13 Plan. The statute refers to "an applicable commitment period" of five years for above median income debtors and three years for below median income debtors. Does the definition create simply a mathematical formula as to the amount that has to be paid, or must the plan match the length of the 3 or 5 year period?