The Bankruptcy Means Test: Overcoming the Presumption of Abuse
For many, seeing the word "bankruptcy" is cringe-worthy. To have it associated with the word "abuse" can be downright scary. While filing a Chapter 7 case under a cloud is serious business, it is not impossible to overcome the "presumption of abuse."
Congress Passed the Means Test to Discourage Chapter 7 Cases
When Congress decided in 2005 to overhaul the bankruptcy laws, it had been more than 25 years since the bulk of the bankruptcy code had undergone any significant revisions. By 2005, Congress had become concerned that too many people were filing Chapter 7 bankruptcy and discharging debts that they could afford to pay, either outside of bankruptcy or through a Chapter 13 repayment plan. The overhaul became the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA for short). Congress built in several provisions that were designed to discourage filers who could still make payments on their unsecured debts, like medical bills, payday loans, and credit card balances.
One of those provisions because what we call the means test.
The Presumption of Abuse
The means test is a calculation designed to determine if you have any money left over at the end of the month that you can presumably devote to paying down your unsecured debt. If you do, you're expected to either file a Chapter 13 repayment plan case instead or not file bankruptcy at all.
If you decide to go forward with a Chapter 7 case anyway, you are doing so under the "presumption of abuse." The presumption is that you can afford to pay some of your unsecured debt, but you're choosing not to by filing the Chapter 7 case. That, Congress deems, may be an abuse of the bankruptcy system.
Presumption of Abuse Does Not Prevent Filing a Chapter 7 Case
If the presumption of abuse arises under the means test calculation, it does not mean that you have "failed" anything. And, it does not mean that you are prohibited from filing a Chapter 7 case. Even if the means test indicates that you have disposable income that you could use to make a Chapter 13 payment, there may be good reasons for you to continue under Chapter 7. The bankruptcy court has the discretion to allow the case to continue, but it will normally require that you provide a detailed explanation of your special circumstances and documentation to back it up.
The Means Test Forms
The form can be found at these links:
Chapter 7 Means Test Calculation (Form 122A-2)
Account for All of Your Allowable Expenses
People pass or fail the means test for one of two reasons. Either their income is too high, or their expenses are not reasonable and necessary for their family's well-being. Therefore, it's important to the means test calculation that you're as thorough and accurate in listing your expenses as possible.
The means test form itself does provide for some unusual expenses. Here are some examples:
- Tuition and other expenses for your child's education if she has to go to a special school because she is physically or mentally challenged.
- Out of pocket health care expenses.
- Telecommunications services, like pagers, call waiting, caller id, special long distance or internet service to the extent necessary for your health and welfare or that of your dependents.
- Your reasonable and necessary expenses associated with the care of elderly, chronically ill or disabled family members.
- Monthly expenses incurred to maintain the safety of your family under federal laws, like the Family Violence Prevention and Services Act.
- Excessive home energy costs.
For some people, accounting for these unusual expenses may be enough to move you from the "fail" to the "pass" column.
Filing a Chapter 7 under a Presumption of Abuse
If you file a Chapter 7 case after the presumption of abuse arises because of the Means Test calculation, your trustee or the US Trustee's office will pay particular attention to your case. Under BAPCPA, you have the burden of proving that you are not abusing the bankruptcy system. That usually requires you to show that you have some special circumstance that causes you to incur expenses that you have no reasonable alternative but to pay.
You will outline your special circumstances on the means test form Part 4. Additional expenses often arise out of the following and may be considered acceptable special expenses for purposes of the means test. :
- Serious medical conditions
- Being called to active military duty
- Recent job loss, income reduction, layoff or forced retirement
- Expenses for a non-filing spouse, such as credit obligations
- Recent marital separation or divorce
- Some courts have found that paying students loans -- not accounted for on the means test form -- is a special circumstance. Other courts have reached the opposite conclusion.
If the Court Does Not Agree
If the trustee or the US Trustee's office does not agree with your decision to proceed under Chapter 7, they will file a motion to dismiss your case. The bankruptcy court will have to decide whether it is appropriate to allow you to obtain a Chapter 7 discharge. If the bankruptcy court does not agree that you present special circumstances, you still have options:
- you can allow your case to be dismissed and wait until your financial picture changes so that you can pass the means test, or
- you can convert your case to a Chapter 13 case and set up a payment plan.
If your income has drastically changed during the six-month look-back period, waiting a few months to refile may be the answer. But also keep in mind that a Chapter 13 plan does not necessarily require you to pay 100% of your unsecured debt before you are discharged. You might prefer a Chapter 7, but a Chapter 13 with low payments over three to five years might be better than going without any relief at all.