Chapter 7 Means Test--What does it mean?

DO YOU PASS THE MEANS TEST (AND QUALIFY FOR A CHAPTER 7 DISCHARGE) ?

A DEBTOR’S ABILITY TO PAY DEBT

People have a lot of questions about the bankruptcy “Means Test”.    The “Means Test” was added to the Bankruptcy Code in 2005 by the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA).   The Means Test is used to help determine if individuals with primarily consumer debt should qualify for Chapter 7 relief (a discharge of debt).  The idea is that if a potential debtor has the “means” (ability) to repay a significant part of their debt, then they should do so either in a Chapter 13 or directly (outside the protection of the Bankruptcy Code).  It is said that an “abuse” of the Bankruptcy Code would occur if such a person with “means” would receive a Chapter 7 discharge.

THE MEANS TEST IS A BUDGET

The Means Test is basically a budget.  It states the average of the debtor’s income for the last six full months just prior to filing.  The debtor’s income today could be completely different – higher or lower, but the Means Test uses the last six month’s income average.   Also, the Means Test expenses  come not from the debtor’s current projected budget, but from (a) national, regional, state and local averages for certain expenses – such as housing, food and transportation and then (b) in part from the debtor’s real world and currently projected expenses – such as child care,  medical expenses and tax on income.    The Means Test subtracts the allowed expenses from the recent past average income to determine how much money (“disposable income”) a debtor has left over, if any, each month on this “budget”.  So, while this budget may or may not reflect a debtor’s current reality, it does make some sense to look at recent actual income and average expenses for certain items. If a Debtor has income over the median income for his household size in his county a Presumption of Abuse can arise. 

A “presumption of abuse” does NOT mean that the debtor does not qualify to file a Chapter 7 and obtain a discharge.   A “presumption of abuse” simply means that the debtor has to “rebut” the presumption of abuse by showing that the debtor’s ACTUAL current and near-term projected “disposable income” is less than the amount that would lead to an abuse.   The debtor rebuts the presumption by providing to the United States Trustee (UST) and/or the court, if needed, evidence of the debtor’s current financial circumstances and that the debtor no longer has ability to repay a significant portion of  the debtor’s general unsecured debt.   If the debtor proves this point, then the debtor has rebutted the presumption of abuse and will receive a Chapter 7 discharge.   The existence of the “presumption” just means the debtor must prove the debtor does not have any significant “disposable income” left over to pay creditors.

On the other hand, just because a debtor files a case with “no presumption abuse” on the Means Test, it does not mean that no abuse would result if the debtor were granted a Chapter 7 discharge.   For example, if a debtor made zero income in the six months prior to filing, then the income on the Means Test would be below median and there could be no presumption of abuse.  However, if that debtor just before filing obtained high paying employment and the debtor now has, for example, $1,000 left over on the current budget after paying reasonable and necessary expenses, then a “abuse” would occur if the debtor would be given a Chapter 7 discharge.  In that case, the UST must prove the debtor is not entitled to a discharge (as opposed the debtor who must prove he is entitled to a discharge if there is a presumption of abuse).  Having a presumption or not just establishes who has the burden of proof.  It’s a little like being presumed innocent until proven guilty.  A debtor with a presumption of abuse must prove there is no actual abuse.  When there is no presumption of abuse, the UST must prove actual abuse.