Our Bankruptcy Attorney Blog

Prior to 2005 it was possible for anyone, in any financial situation, to file for Chapter 7 bankruptcy in the United States. Whether or not the case would be accepted by the court was at the discretion of the judge, who weighed the applicant’s financial status in order to make this determination. However, in 2005 the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) took this discretion away from the judges and implemented a means test which limits the ability of people to file for Chapter 7 bankruptcy. By all accounts the BAPCPA was drafted by the institutional lending industry and was specifically designed to make filing for bankruptcy slower, more expensive, and less beneficial and the means test is just one aspect of this general policy of making bankruptcy more difficult.

The determining factor as to whether or not the means test should be applied to any particular case relates to the filer’s income over the preceding six moth period before the case is filed with the bankruptcy court. This is quite deliberate as it prevents many people from claiming bankruptcy until they are facing utter destitution, which more or less defeats the overall purpose of bankruptcy protection in the first place. Regardless of the current state of affairs, the filer’s income over the previous six months is now effectively held against them, meaning that just to qualify for Chapter 7, many debtors are more or less obligated to go through half a year of extreme financial difficulty.

As is the case with all aspects of the Bankruptcy Code (U.S.C. Title 11), the means test is a very complicated process involving three distinct steps. The first of which is to compare the debtor’s income over the previous six months with the median income of the state in which they live. If the debtor’s income over the preceding six months is above the state’s median income – regardless of the debtor’s current situation – then Chapter 7 bankruptcy is automatically denied to the debtor though Chapter 13 bankruptcy may still be available.

If the debtor’s income was below the state median income, then the second phase of calculations comes into play. This phase takes the debtor’s income and then subtracts a number of predetermined living expenses in order to determine the filer’s discretionary income. The discretionary income is then multiplied by sixty, representing the sixty monthly payments of a five year Chapter 13 debt restructuring plan. If this discretionary income exceeds $10,000, or $166 per month, then Chapter 7 bankruptcy is denied and the debtor is told to use Chapter 13 instead. The problem with this is that the list of living expenses is extremely biased against the debtor, so this formulation rarely reflects the debtor’s actual discretionary income. Further, the expenses also exclude all of the debtor’s debt payments, even ones that cannot be discharged or restructured through bankruptcy.

After this there is a third calculation based on the discretionary income determined in the second calculation. However, as noted above, that calculation is very misleading in many cases, making the third one improper as well. The ultimate purpose is to make it extremely difficult for people to use bankruptcy as it was meant to be used: as a safety net to prevent people from falling into extreme poverty. Instead, the means test does the opposite, essentially forcing someone to go into extreme poverty before they can even file for protection.

Tags: banktruptcy

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