The Means Test & Chapter 7
Simply put, the Means Test determines whether a person or married couple are eligible to file a chapter 7 bankruptcy or whether they must file chapter 13 instead. Chapter 7 is the quicker and simpler of the two, and preferable for most folks. The Means Test uses a formula to determine, based upon personal income or two incomes in a joint case where both spouses are employed, if the debtor(s) have sufficient disposable income to repay a portion of their unsecured debts. Under the means test formula, if it is shown that the person’s current monthly income exceeds permitted monthly expenses by a specified amount, a presumption of abuse arises and the trustee will move to dismiss the chapter 7. The 7 may be converted to a 13.
However, in preparing a chapter 7 case for filing, as a knowledgeable Ft. Lauderdale bankruptcy attorney, I am able to ascertain if we will have a means test issue. “Permitted monthly expenses” are necessary expenses up to certain amounts based upon I.R.S. rules. These I.R.S. rules provide a set allowance for such items as food, clothing, household supplies, personal care and miscellany, depending on income and household size. If a specified expense by my client is greater than the I.R.S. rule we cannot override the rule, we are stuck with the top end of the I.R.S. allowance for purposes of means testing.
The allowed expenses and various categories have some slight wiggle room. On occasion, I advise my clients on what I term doing some negative estate planning, which will, in due course, will change the presumption to no abuse, and we can proceed with a chapter 7 filing. Again, this is where the expertise of an experienced bankruptcy attorney is so valuable.
In retirement planning type cases where bankruptcy becomes a tool affording a much more comfortable retirement, and the income is low or just consists of say, social security and a small pension, my clients are exempt from means testing and it is not an issue.
I might also mention that often I file cases where one spouse has all the debt and the other spouse has little debt, so as to render it unnecessary for that no-debt spouse to file. That spouse is called the non-filing spouse. However, if the married couple is living together and both receiving income, the non-filing spouse’s income still must be shown on the bankruptcy petition and it is also considered in the means testing. Only if the parties are living apart may the non-filing spouse’s income not count and need not be shown.
The monthly income(s) to be plugged into the means test formula are averaged over a 6-month period leading up to the filing date. So it is conceivable that greatly fluctuating income can still average out to pass the means test.
The number of dependents is also very useful in passing the means test and the dependents do not necessarily have to live in the debtor’s household. That is to say, someone with no dependents might not pass the means test, but that person or couple with the exact same income might pass the means test with one or more dependents.
Social security, workmans compensation and other government assistance does not count as income for purposes of the means test.
If, under means testing, disposable monthly income is such that a presumption of abuse arises and a motion to dismiss or convert is filed, the presumption may be rebutted if it is shown that special circumstances exist, such as a serious medical condition or a call to active duty in the Armed Forces and that the special circumstances justify additional expenses or adjustments of the current monthly income for which there is no reasonable alternative. Of course, such a circumstance must be itemized and proved by documentation.
In my bankruptcy practice I get great satisfaction in playing an important role in someone’s life when they are at a low point economically and struggling. This is bolstered by the way bankruptcy relief is so pervasive; it doesn’t just help a little or only temporarily, the relief I afford my clients erases forever all their credit card or medical debt and gives them a fresh start. If you’ve been around awhile like me, you might remember an old, black and white television ad touting “a new lease on life”. That’s what I can do for my clients.
And don’t forget President Trump opined that he “only used an American law for his benefit” (and there is nothing wrong with that).
Too much debt? Call me. I can help.
Steve Glerum, Ft. Lauderdale Bankruptcy Attorney