Redwood City Bankruptcy: The Means Test

The Means Test is a check to make sure that those who file for Chapter 7 are not taking advantage of the law. It seeks to make sure that debtors are not making too much money to receive the benefits of a Chapter 7 discharge (forcing them to file under Chapter 13 or Chapter 11).

More specifically, in 2005, Congress passed the Bankruptcy Abuse and Consumer Protection Act (BACPA) making some minor, and some significant, changes to Title 11 of the United States Code. The most important of these changes, from the perspective of the typical, non-business entity consumer, is the introduction of the Means Test. The exact language of the Means Test can be found at 11 USC §707 or at this web link: Click here. The Means Test is intended to be a snapshot of the debtor’s finances at the moment of (or at least during the month of) the filing of the petition.

It works like this: start by figuring out what you have made, on average, over the last six months. If the amount is less than the statewide average for families of your size (including a family of one), you “qualify” for Chapter 7. If this amount would be greater than the statewide average, then you must partake in a detailed examination of your finances, i.e., the Means Test. The detailed examination then works by deducting from your average monthly income over the last six months various permissible deductions. Such deductions include what you pay in taxes, automobile ownership and use, child care, charity, care of the elderly, etc. Contrastingly, despite what you may personally pay for your rent and utilities, the permissible deductions for each is determined by the IRS. Debt you owe to credit card companies is not included in the Means Test, however. And if you own a home, your actual mortgage payments (and taxes and insurance), if above the standard deduction for rent, can be subtracted, to your benefit. The list of elements to consider is long and can be tedious, but once all the factors are added together, if what remains is low enough, you “qualify” for bankruptcy.  

The term “qualify” is inappropriate, however. What the Means Test says is essentially that every Chapter 7 filing is “presumptively abusive” of the law. If you demonstrate that you make less than the statewide average or you make more than the statewide average but your permissive deductions are high enough, then you have “overcome the presumption of abuse” and have passed the Means Test.

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