Sunday, July 31, 2005

Bankruptcy Means Testing

One of the most prominent changes in bankruptcy law is the inclusion of a means test in order to determine a debtor's eligibility for chapter 7 liquidation. The working in section 707 which used to allow for dismissal of a case for "substantial abuse" has been replaced with rebutable presumptions of abuse and an allowance for "general" abuse. The first bright line test is this; If household income is less than the median family income (for 1,2,3,4... family members) for the state you live in then there is no presumption of abuse. Median family incomes for South Carolina: 1, $____ 2, $____ 3, $____ 4, $56,433 (the numbers are out, but I have only found this, also, the numbers will be revised and published at about the same time this law goes into effect). Under current law I would be concerned about filing a chapter 7 for a family of four with over $56,000 annual income unless they had some very high necessary expenses.

If you find that your client has income over the median and you are still trying to qualify for a chapter 7 you will need to test their income with the test laid out in 707(b)2 which is as follows:

(2)(A)(i) In considering under paragraph (1) whether the granting of relief would be an abuse of the provisions of this chapter, the court shall presume abuse exists if the debtor's current monthly income reduced by the amounts determined under clauses (ii), (iii), and (iv), and multiplied by 60 is not less than the lesser of—
(I) 25 percent of the debtor's nonpriority unsecured claims in the case, or $6,000, whichever is greater;
(II) $10,000.
(ii)(I) The debtor's monthly expenses shall be the debtor's applicable monthly expense amounts specified under the National Standards and Local Standards, and the debtor's actual monthly expenses for the categories specified as Other Necessary Expenses issued by the Internal Revenue Service...

That's simple enough. Right! Basically, if the clients would have between $100 and $166 or more disposable income per month after deducting IRS standard expenses then there is abuse and they case must either be dismissed or converted to one under chapter 13 (with debtor consent). It seems that it would be better to know the answer to this calculation prior to filing. I'm sure others are working on tools to determine this calculation, I have put together a multi-sheet excel workbook that one can plug the numbers into and get your answer. Please take a look at it (c
alculation) and try it out. If debtors pass this test, then they may file a chapter 7 and rebut the presumption of abuse.

This scheme leads to some odd outcomes:

1. No matter how much disposable income a debtor has, as long as their income is less than the state median, noone has standing to use the means test to object to discharge (only under "general" abuse, whatever that is).

2. It is mathematically possible for a debtor to be over the median income, work through the means test, and not have enough unsecured debt to file a chapter 7. (this is shown on my website example 707(b)2 calculation).

Comments to these posts would be greatly appreciated, it can be done anonymously....


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