Redwood City Bankruptcy: The Means Test is Pro-Debtor

Because it is relatively new to bankruptcy (2005), the Means Test itself comes under regular scrutiny by the courts, as trustees challenge various aspects of language. It is subject to change over time, at least with respect to how certain aspects of its language are interpreted. For now, the general rule seems to be that the Means Test is to be construed liberally but with common-sense constraint. In other words, the Means Test is pro-debtor.

For instance, the Means Test allows a homeowner to use his true mortgage payments as a qualified deduction from his income, even if this amount is greater than the presumed IRS standard for housing costs. More than that, though, this qualified deduction is permissible even if the homeowner intends to walk away from her house as part of the bankruptcy. This is a liberal, pro-debtor interpretation of the Code. But again, the courts have ruled that had Congress wanted to prevent homeowners from doing this, they could have simply altered the language of the Code. Since they have not, and the Means Test is merely a snapshot of the current financial situation of the debtor, this benefit is afforded to debtors.

Another pro-debtor aspect of the Means Test is the permissive 15% cap on charitable contributions. This suggests Congress’ lasting appreciation of the role of religion in America. Many people still tithe (or give to their church) at about 10% of their income. The code allows up to 15% and does not require per se proof. While a trustee would assuredly inquire about such substantial giving, there is no receipt-requirement for charity. An explanation is all that need be given.

Other aspects of the Means Test show it to be exhaustive but not prohibitive. It allows a deduction for cell phones – an important item for daily living but not necessary for survival; it allows a deduction for actual costs paid for child care; it allows for life insurance premiums above and beyond the standard deduction for health insurance. And the Means Test need not even be performed at all if the debts which are compelling the filing of the Chapter 7 are related to a failed business or otherwise not “primarily consumer debts.”

A person should not consider a Chapter 7 bankruptcy because he is worried that the Means Test would disqualify him(or, to be specific, create a presumption of an abusive filing). Please call Sagaria Law in Redwood City to obtain legal advice before making any permanent decisions. The Means Test is intended to prevent abuse, not discourage those in legitimate need.

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