The Truth About The Means Test


(image from website)


The means test was made law in 2005, at the behest of the creditor lobby to stop abusive bankruptcy filings, which were supposedly costing the average American family $400 per year..

An obtuse formula is used to weed out those who supposedly can afford to pay something to their creditors.

There was no income component to bankruptcy pleadings until the mid 1980s.

The 1979 reform made a standard set of Federal exemptions available for the first time, though states were allowed to opt out and require their citizens to use state exemptions.

With the Carter recession, bankruptcy filings reached record numbers, and the creditors screamed that people who made good money, but had few or exempt assets, could file bankruptcy and discharge their debts.

So Schedules I and J were introduced, for people filing to list their monthly income and monthly living expenses.

Courts were given the power to dismiss cases that were a “substantial abuse.”

Of course, different judges ascribed different meanings to that phrase.

The creditor lobby resumed screaming that the damn judges were not strict enough, and not enough cases were being dismissed.

After buying several successive Congresses, costing over $100 million total, they got what they thought they wanted, a bright line test based on average income for the county of the family filing, and average allowable living expenses, both based on IRS data, the so-called “means test.”

The truth about the means test is, it has largely failed in its avowed goal of reducing Chapter 7 filings and increasing Chapter 13 payment plan cases.

It has increased the cost to consumers to file bankruptcy, as it takes more attorney time to properly fill out the 6 page form.

There are two ways to pass the means test:

1. If your household income is less than that for your size household in your county, end of story, you are in.

2.  If your income is over that median income, you complete the rest of the form, and, depending on your deductions, house and car payments, health savings accounts, how many cars, and so on, you may still pass.

There is a third option.

You can still file Chapter 7 bankruptcy and plead special circumstances.

As the means test income is based on the last 6 complete calendar months before you filed, if you had a good job and lost it, and your income is way down, that could be a special circumstance.

You can see why you need an experienced lawyer to help you through this stuff, but, most families are still eligible for Chapter 7 relief, so, from the creditor lobby standpoint, the means test failed.


The Truth About The Means Test

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