The Means Test
The Means Test was a change that was added by the 2005 changes to the bankruptcy law. It’s designed to force those that make over a certain amount to file a Chapter 13 bankruptcy instead of Chapter 7 under the theory that if the debtor is making over a certain amount of money (the “mean”), then he or she should be required to pay more back.
The initial threshold inquiry is determined by an objective standard based on the location of the debtor and the number of the debtor’s dependents. If the debtor makes below the mean for that region and number of dependents, then the presumption of abuse does not arise. If a debtor’s income exceeds the initial threshold, then further analysis is necessary. The means test is generally based on income for the past six months. However, certain adjustments for recent or upcoming changes is appropriate. A recent unemployment would factor into the means test, as would recent employment.
This analysis is accomplished through a fairly complicated formula laid out in Bankruptcy Form 122A (in the case of Chapter 7 filings) or Form 122C (in the case of Chapter 13 filings). Deductions are allowed for numerous items, and it is still possible for the presumption not to arise.
Passing the means test gives a debtor a green light to file Chapter 7, which provides for more immediate and thorough relief. A Chapter 7 case typically lasts 3-4 months, and at the conclusion of a Chapter 7, most debtors will obtain a complete discharge of all of their unsecured debts.
Finally, even if a presumption of abuse does arise, it is possible for a debtor to overcome this presumption with facts that overcome the presumption. Mitigating facts could include a very recent job loss that is not adequately factored into the 6-month lookback; high expenses that may not be taken into account under the rigid parameters of the means test.
One final note – if a debtor’s debts are primarily non-consumer debts, then the means test analysis is complete, and no further action is required on the part of the debtor. A presumption of abuse could still be asserted by the trustee, but the presumption will not arise automatically by resort to a comparison of the debtor’s income with a mean. The analysis of whether a debtor’s debts are primarily non-consumer debts is a fairly objective standard that looks at all of the debts, and if more than 50% are “non-consumer,” then that debtor’s debts are primarily non-consumer. The characterization of most debts as “consumer” or “non-consumer” is fairly obvious. A home mortgage is a consumer debt. A vehicle loan is more than likely a consumer debt. Student loans are consumer debts. Credit cards are typically consumer debts, but that analysis could change if a debtor was using their personal credit cards to fund their business. Taxes are a closer call. Most courts consider taxes to be non-consumer debt.
A careful analysis of the means test is important, and it’s important that analysis occurs prior to filing. If a debtor rushes to file – which is sometimes unavoidable because of circumstances, the failure to recognize the appropriate characterization can cost a debtor thousands of dollars.