If your income is higher than the median and you have too much disposable income, you’ll need “special circumstances” to do a Chapter 7.

  

The “Presumption of Abuse”

The means test determines whether you qualify to file a Chapter 7 “straight bankruptcy” case—or whether instead you have too much “means” to do so. If you don’t pass the means test, your case is said to be presumed to be an abuse of Chapter 7. That’s just another way of saying you are not legally appropriate for this type of bankruptcy relief. Then you can’t proceed with your Chapter 7 bankruptcy case, and your case will either be dismissed (thrown out) or more likely converted into a Chapter 13 “adjustment of debts” type of bankruptcy instead.

There are a number of levels to this test. Once you pass it at any of the levels, you don’t have to go any further. My last few blog posts explored the earlier levels; today is about the final level. You only get here if you haven’t passed the means test on any of the earlier levels.

The Earlier Levels of the Means Test

You can avoid this presumption of abuse IF ANY of the following apply to you:

First, your income is no more than the median family income for your state and your size of family. See this website for the current median income amounts. Caution: “income” has a very specific and unusual definition for means test purposes. See my recent blog posts for more about this.

Second, if your income is more than the applicable median family income amount but, after subtracting a list of allowable expenses, your remaining monthly disposable income is less than about $125 per month, then you pass the means test.

Third, if your income is more than the applicable median family income amount, AND your remaining monthly disposable income after the allowable expenses is more than about $125 per month but no more than about $208 per month, then you may be able to still pass the means test. But that’s only if, when you multiply your monthly disposable income amount by 60, that total is less than 25% of your “non-priority unsecured debts” (debts not secured by collateral, excluding special “priority debts”—certain taxes, support payments, and such).

It’s somewhat rare that a person who needs and wants to file a Chapter 7 case would not have passed the means test through one of the above levels. A large percentage of people pass on the first level by simply having low enough income. Others pass at the second level because their income is low enough compared to their expenses. And others pass because the amount of their disposable income after expenses is low enough compared to the amount of their debt.

The Last Level

BUT, if after all this you haven’t passed the means test that your case is still under a presumption of abuse, you still have one more last chance, one last level of the means test to pass. You can show “special circumstances.” The Bankruptcy Code lays out this out as follows:

[T]he presumption of abuse may… be rebutted by demonstrating special circumstances, such as a serious medical condition or a call or order to active duty in the Armed Forces, to the extent such special circumstances… justify additional expenses or adjustments of current monthly income for which there is no reasonable alternative.

Congress did not make clear what counts for “special circumstances” beyond the two examples provided.

The Means Test Ends Up Being Not So “Objective”

So when pushed to the last level, a test that was intended to be an objective way to decide who qualifies to file a Chapter 7 bankruptcy comes down to a very subjective question about whether any “special circumstances” apply. Talk to your attorney about how this phrase is being interpreted in your local bankruptcy court.

 

The point of the “means test” is to objectively judge whether you have the means to pay your creditors. But this test is very arbitrary.

 

As we explained in last week’s blog post, the “means test” is supposed to be an objective way to decide who qualifies to file a Chapter 7 bankruptcy. That decision used to be more in the hands of bankruptcy judges, who were apparently seen as being too lenient with debtors (which is odd because the majority of the judges are former creditor attorneys!).

The “Objective” Rule

As also discussed in the last blog post, there is a very specific formula for determining if you can do a Chapter 7 case: if your budget shows that you have some money left over each month—some “disposable income”—it all depends on its amount and how it compares to the amount of your debts. This is how “objective” this rule is:

  1. If your “monthly disposable income” is less than $125, then you pass the means test and qualify for Chapter 7.
  2. If your “monthly disposable income” is between $125 and $208, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied “disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
  3. If EITHER you can pay 25% or more of those debts, OR if your “monthly disposable income” is $208 or more, then you do NOT pass the means test. BUT you still might be able to do a Chapter 7 case IF you can show “special circumstances,” such as “a serious medical condition or a call or order to active duty in the Armed Forces.”

Where Do Those Crucial Amounts—$125 and $208—Come From?

Notice the huge difference in effect of these numbers. If you have less than $125 to spare, you are “presumed” to qualify for Chapter 7; if you have more than $208 to spare, you are
“presumed” to not qualify for Chapter 7, unless you can show “special circumstances.” And if you have an amount in between, then you must apply that 25% extra condition.

That’s a huge difference in consequences for a spread of only $83 per month.

So where do these hugely important numbers come from?  The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,475 and $12,475. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.

So where did those original $6,000 and $10,000 amounts come from?

They are arbitrary. Why was anything less than $6,000 (now $7,475) considered low enough to allow a Chapter 7 to proceed, while anything more than $10,000 (now $12,475) was considered high enough to not allow it? Some creditor lobbyist or Congressional staffer likely just came up with those numbers, and maybe they were negotiated in Congress. In any event, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts in determining whether a person should or shouldn’t be allowed to file a Chapter 7 case.

The Bottom Line

Sensible or not (and there is a lot in the “means test” which is not!), if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7 (see our earlier blog about that). But if you are over the median income amount, then the amount of your “monthly disposable income” largely determines whether you are able to file a Chapter 7 case. (Remember that most people needing a Chapter 7 case qualify easily by having low enough income, skipping the complications covered in today’s blog post.)

 

If your income is higher than “median income,” you may still file a Chapter 7 case by going through the expenses step of the means test.

 

The Easy, Income Step of the Means Test

The last couple of blog posts have covered the first step of the means test, the income step. It says that if your “income”—as that term is uniquely defined in this law—is no more than the published median amount for your state of residence and for your size of family, you can skip the rest of the means test, and you generally qualify for a Chapter 7 “straight bankruptcy” case. You don’t have to go through the rest of the means test.

The Admittedly Complicated, Expenses Step of the Means Test

If on the other hand your “income” is greater than the median income amount applicable to your state and family size, then you have to go through the detailed expenses step to see whether you can participate in a Chapter 7 case.

The Challenge of the Means Test

The concept behind the means test is pretty straightforward: people who have the means to pay a meaningful amount to their creditors over a reasonable period of time should be required to do so. But putting that concept into law resulted in an amazingly complicated set of rules.

These expense rules are detailed and rigid because Congress was trying to be objective. The assumption was debtors would just inflate their anticipated expenses to show that they had no money left over for their creditors—no “means” to pay them anything.

One of the complications is that the allowed expenses include some based on your stated actual expense amounts, while others are based on standard amounts. The standard amounts are based on Internal Revenue Service tables of expenses, but some of those standards are national, some vary by state, and some even vary among specific metropolitan areas within a state. There are even some expenses which are partly standard and partly actual (certain components of transportation expenses).

There are also rules about when to allow and how to determine the allowed amounts for secured debt payments (vehicle, mortgage) and for “priority debts” (income taxes, accrued child support).

If You Have Disposable Income

After all that, if after subtracting all the allowed expenses from your “income” you have some money left over, whether you can be in Chapter 7 depends on the amount of that money and how that compares to the amount of your debts:

  1. If the amount left over—the “monthly disposable income”—is no more than $125, then you still pass the means test and qualify for Chapter 7.
  2. If your “monthly disposable income” is between $125 and $208, then apply the following formula: multiply that amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If the multiplied total is less than 25% of those debts, then you still pass the means test and qualify for Chapter 7.
  3. If after applying the above formula you can pay 25% or more of those debts, OR if your “monthly disposable income” is more than $208, then you do NOT pass the means test, UNLESS you can show “special circumstances,” such as “a serious medical condition or a call or order to active duty in the Armed Forces.”

THAT’s Complicated!

True enough. So you certainly want to have an attorney who fully understands these often confounding rules and how they are being interpreted by the local bankruptcy judges and the pertinent appeals courts.

If you don’t pass the means test you will instead likely end up in a 3-to-5-year Chapter 13 case. Not only would that mean getting full relief from your debts years later than under Chapter 7, with a similar delay in rebuilding your credit, you may well also end up paying thousands, or even tens of thousands, more dollars to your creditors. It’s definitely worth going through the effort to find a competent bankruptcy attorney to help you, whenever possible, find a way to pass the means test.