The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA) introduced a means test to determine whether the bankruptcy petitioner filing for Chapter 7 is presumed abusive. If the petitioner fails the means test, he will have to file Chapter 13 and make payments to unsecured creditors over a 3 or 5 year period, unless he can show that special circumstances should rebut the presumption. Although Congress did not define what the special circumstances would be, it gave some illustrations, such as a serious medical condition. I would deem that, since the means test depends on the average monthly income and average monthly expenses and debt payments in the 6 months prior to filing for bankruptcy, a significant change in income or expenses would constitute special circumstances—thus, a serious medical condition would certainly increase expenses, and may decrease income. However, this is just a reasonable opinion, not a legal opinion. As the number of cases filed under the new law increase, there will probably be a number of legal opinions as to what constitutes special circumstances. In any case, the presiding judge would be the ultimate arbiter of determining whether any set of circumstances would be special in a particular case.

There are 2 forms for the means test: Form 22A—Chapter 7 Statement of Current Monthly Income and Means-Test Calculation—for Chapter 7 petitioners, and Form 22C—Chapter 13 Statement of Current Monthly Income and Calculation of Commitment Period and Disposable Income—for Chapter 13 petitioners. Form 22A is completed to determine whether a Chapter 7 filing would be presumed abusive; form 22C is used to calculate the monthly income and disposable income, which is income left over after paying secured and priority debts, and whether the time period of the repayment plan will be 3 or 5 years.

Although the forms for the means test are somewhat lengthy, the principle is simple to understand. A Chapter 7 bankruptcy is basically a liquidation, which is usually completed in 4 to 6 months—the debtor is entitled to keep certain property that is exempt under the applicable law; anything else of value would be sold by the trustee to pay unsecured creditors. A Chapter 13 bankruptcy requires the debtor to make payments to unsecured creditors over a 3 or 5 year period.

The means test simply calculates whether the debtor, if his income is greater than the state median, will have enough income after paying necessary living expenses and required debt payments, to pay at least 25% of unsecured, non-priority debt, or $10,950 (this is the current figure, which increases periodically), whichever is less. If the debtor fails the means test, then a Chapter 7 filing would not be presumed abusive. However, the judge can, if the facts of a particular case warrant, rule that allowing the debtor to file Chapter 7 would be abusive, and could, therefore, force him to convert his case to Chapter 13 anyway. According to a recent report (see below), 94% of the people filing for bankruptcy had incomes below their state's median income, so most debtors do not have to worry about the means test.

The first major section—Calculation of Monthly Income—requires information to determine the average debtor’s income from all sources in the 6 months prior to filing, and compare it to the median income for the debtor’s state. Half of the people in the state make less than the median income, and half make more. If the debtor’s income is less than the state’s median income, then he does not need to continue with this form.

Although the actual values that must be used are provided by the Census Bureau for each state, the following table shows the average of all states at this time (April 22, 2007) for a family size of 1, 2, 3, and 4:

Add $6,900 (this figure is also adjusted periodically for inflation) for each individual over 4.

Disposable Income: In bankruptcy, it is income minus allowable living expenses minus secured debt payments minus priority payments.
Priority Debt: A debt, such as for back taxes, child support, or alimony, that is usually not dischargeable.
Priority Payments: Payments, such as for taxes and child support, although not secured, must be paid.
Secured Debt: Debt for an item that a creditor has a lien or title to, or, through contract, has a right to repossess, if payment is not made.

The next major section—Calculation of Deductions Allowed Under § 707(b)(2)—consists of several subparts. Subpart A: Deductions under Standards of the Internal Revenue Service (IRS) calculates what the local expenses would be for a household of a particular size, as determined by the Internal Revenue Service (IRS)—not the debtor’s actual expenses. (Current values:IRS Data for Allowable Living Expenses—See Section II for the IRS information.) These expenses include general living expenses, such as for food, clothing, household supplies, personal care, housing and utilities, rent or mortgage expense, and transportation expenses. Note that if a debtor is paying a mortgage, or is paying a loan for a car or leasing it, the expense that is for the actual debt is separated from the allowable expense, because the debt itself is not an actual necessary, living expense. It also includes other necessary expenses, such as taxes, mandatory payroll deductions, life insurance, court-ordered payments, education for employment or for a physically or mentally challenged child, child care, health care, and telecommunication services necessary for the debtor’s health and welfare, or that of his dependents.

The next major section—Subpart B: Additional Expense Deductions under § 707(b)—requires actual expenses for health insurance, disability insurance, and health savings account expenses; contributions for the care of immediate family members who are disabled, chronically ill, or elderly; expenses incurred to maintain the safety of family members under the Family Violence Prevention and Services Act, home energy costs above that allowed by the IRS, limited monthly educational expenses for dependent children; additional food and clothing expense over and above that allowed by the IRS data; and continued charitable contributions.

The next major section—Subpart C: Deductions for Debt Payment—includes the required payments for secured debts and priority debts, which are debts that are not secured, but important debts that are not dischargeable, such as child support and alimony payments. This section also include Chapter 13 administrative expenses that are calculated by multiplying the projected monthly payment by a multiplier, which can be found for each state here (Schedules of Actual Administrative Expenses of Administering a Chapter 13 Plan): http://www.usdoj.gov/ust/eo/bapcpa/20070201/bci_data/ch13_exp_mult.htm. The multiplier generally ranges from 5% to 10%, although a few districts are less than 5%.

Disposable income is the income left after subtracting the above necessary living expenses, payments for secured and priority debts from the current monthly income. If this income is less than $6,575 over a 60 month period, then the presumption of abuse does not arise. If the amount is more than $10,950, then the presumption does arise. If it is between these figures, then the presumption arises only if the figure is greater than 25% of the debtor’s total non-priority, unsecured debts.

“Of the individual debtors who filed from October 17, 2005, through the end of September, 94 percent were below the median income. Of those above the median, the United States Trustees determined that slightly less than 10 percent were “presumed abusive.” Of the presumed abuse cases that did not voluntarily dismiss or convert, United States Trustees filed motions to dismiss in about three-quarters of the cases and declined to file in about one-quarter of the cases. These data suggest that the means test is a useful screening device to identify abusive cases. They also suggest that the statute provides the United States Trustees with sufficient discretion so that decisions on filing motions to dismiss can be made on a case-by-case basis and not solely with reference to the statutory formula.”

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Average Median Income for All States
$39,802	$51,006	$59,140	$68,136

The Means Test in Bankruptcy—Is There a Presumption of Abuse?

Bankruptcy — Table of Contents

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