Many people contact me and ask whether I think they make too much money to file for a Chapter 7 bankruptcy. What they are really asking is whether the “means test” that they may or may not have heard about by name excludes them from the Constitutionally guaranteed bankruptcy process. Some of them have even spoken with a lawyer who has expressed an opinion on their question in terms of its answer being a yes-or-no or black-and-white fact. “No, if you make $X per year, you cannot declare bankruptcy,” or, “Yes, since you make less than $X per year, you may declare bankruptcy.”
Fortunately, it is not so simple as that. The so-called Means Test, which is the result of a provision inserted into the Bankruptcy Code in the 2005 BAPCPA amendment to the Code, is a somewhat disengenuous attempt by anti-consumer lawmakers to root out fraudulent bankruptcy petitions, despite that fact that no evidence was proffered to prove that there was any widespread national problem with consumer bankruptcy fraud. Regardless of the baselessness of its alleged purpose, what it is, at its core, is a mathematical formula, the result of which determines whether a given bankruptcy petition should be assigned a “presumption of abuse” or not by the bankruptcy court. Petitions that fall within this “presumption of abuse” range must prove that they are not, in fact, fraudulent. The same, new section of the Bankruptcy Code allows the bankruptcy court to dismiss a Chapter 7 case if it is not proven that the petition is not “abusive.”
The Means Test is applied to consumers whose debt is primarily consumer debt and not business or other debt.
Before the Means Test formula is applied, however, there are some “safe harbors” which save certain consumers from having to work through the test in the first place. The primary “safe harbor” is for debtors with incomes below the state’s median income. If your current monthly income X12 is equal to or less than your state’s median income, the Means Test need not be applied and motions to involuntarily dismiss the petition as abusive, as described above, may not be brought. In Michigan, where I practice, the median income is set to increase after March 15, 2009 to $44, 703 for a single earner (it increases incrementally for each additional person in the household), so, for example, a single person earning $40,000/year would not be subjected to the Means Test. There are various particulars involved in determining exactly what incoming assets are considered to be part of a person’s “income” for purposes of this test, but, if, in total, the figure is below the median-line, there is considered to be “no presumption of abuse.” Additionally, there is a separate safe harbor for disabled veterans if their debt was incurred primarily while they were on active duty or performing related activities.
Where the debtor’s income is over the median-line for their state for a household of their size and they are not a qualifying, disabled veteran, the next step in the process is to apply the Means Test to determine whether there is a “presumption of abuse.” A presumption of abuse occurs when the result of the Means Test formula is that, after various expenses specified by the Bankruptcy Code are deducted, a debtor’s income, when multiplied by 60, is the lesser of $10,000 or 25% of the debtor’s non-priority, unsecured debt—as long as that 25% is $6000 or more.
Get that?
What it means is that, once you deduct a bunch of expenses that the Bankruptcy Code allows you to deduct, you multiply your monthly income by 60, and, if the result is either under $10,000 straight off or over $6000 and also amounting to 25% or more of your “non-priority, unsecured debt,” the bankruptcy court will presume that your petition is fraudulent.
As I said, it’s not a simple process, and there is no easy determination of “eligible to file” or “not eligible to file.” Even if reading my explanation of the test itself makes pretty good sense to you—and I hope it does—the devil, as always, is in the details. For instance, some of the expenses you are allowed to deduct from your income off the top are education expenses, charitable contributions, secured debt expenses, health insurance, etc., etc., etc. Figuring out exactly what that final monthly income amount is prior to even administering the test itself is no mean feat. In addition, the question of whether debt is “priority” or “non-priority,” “secured” or “unsecured” is also something that cannot be answered at first glance. For an experienced bankruptcy attorney, these are, however, familiar terms and concepts, and he or she can quickly and properly ascertain these things—just not usually over the phone in a brief conversation.
If the Means Test, after all of this, determines that there is a “presumption of abuse” in the debtor’s petition, that presumption can be rebutted by certain “special circumstances.” What this amounts to, basically, is an argument that there are reasonable reasons why your income falls where it does and that those reasons are not abusive or fraudulent. Each bankruptcy court has wide latitude to agree or disagree with this argument, and it takes a skilled attorney to carry it across.
In short, if you have spoken with an attorney who has, rather too quickly assured you that you are ineligible to file for bankruptcy, seek a second opinion. On the other hand, if you are hoping to simply call an attorney and, in a two-minute conversation, find out whether you are eligible to file a Chapter 7, think again. Determining a Means Test outcome requires a lot of work for both a debtor and his or her attorney, and it is truly a process requiring mutual effort.
If you would like to discuss your ability to file bankruptcy and explore all of the options available to you, please contact me to schedule a free, initial consultation.
