Mar 8

Bankruptcy Means Test

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In 2005 when the bankruptcy code was rewritten the legislature imposed many new requirements on debtors to making them prove entitlement to bankruptcy relief. One new requirement was a means test arguably designed to help show whether a person was abusing the right to file chapter 7. Bankruptcy is one of the few areas of law where you have to prove you are entitled to protection under the law before you get the protection. The rest of the citizens of the USA get to rely on protection of our laws, especially the ones guaranteed to us in the constitution, and it is up to the person who wants to deny us of those protections to prove that we are not entitled to them. But bankruptcy now works backwards, did not used to, but is does now.
Under the means test, if a person makes more than the average income of people living in the same region, then that person is presumed to be abusing the bankruptcy code by filing a chapter 7. That person gets a chance to rebut the presumption but it is still there.

A person’s average monthly income is calculated in the means test by taking gross income for the prior six months, doubling it and dividing by 12. If that figure is above the average for the reason, taking into account family size, then the debtor has to rebut the presumption of bankruptcy abuse. This test results in some really interesting results. For example, a person who had a good job then lost it might not qualify for chapter 7 bankruptcy because his or her income for the six months prior would cause the presumption to arise. The opposite might happen if a person who had been unemployed for 5 months found a very good job with a great income going into the future but because of being previously unemployed he or she would qualify for a chapter 7 bankruptcy as long as they moved fast enough.

Current Monthly Income is defined in the bankruptcy code as:
(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 during 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) includes any amount paid by any entity other than the debtor (or in a joint case the debtor and the 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.

One quandary with this definition is what “average monthly income from all sources” applies to. Suppose for example a debtor received a onetime settlement equal to a few months income shortly before needing to file. Including this settlement in the means test exponentially skews the income because of the way the means test calculates income. A $20,000 settlement would make the average monthly income seem to be $40,000 a year higher. It would require a debtor to file chapter 13 and make it look like the disposable income was based on an income $40,000 more that it really is, in a circumstance when the true income justifies filing for chapter 7 bankruptcy. So how is such a settlement handled? Perhaps because the statute talks in terms of monthly income, section B even mentions payment on a regular basis, neither of which apply to the one time settlement, then the settlement is not income, but merely an asset and should not be used as part of the means test. It surely could not be relied upon as a regular payment in the future to contribute to any chapter 13 bankruptcy plan payments. It is something to think about.

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