Short Answer:  There’s still some hope, but hold on tight.

Long Answer: I hate the Means Test. I have just this second decided that will be the subject of my next posting as explaining why would take some time. Suffice it to say, it doesn’t make any sense. So we have the Means Test that was given to us to use beginning October 17, 2005 in 11 USC 707(b).

The premise of the Means Test is this: if a debtor’s household income for the past six calendar months averages more than the median income for their state and household size, then there is a presumption that there is “some” ability to repay something to the unsecured creditors in a Chapter 13 Plan and therefore receipt of a discharge under Chapter 7 (total liquidation) would be an abuse of the American Bankruptcy system.

The first step is to see if the last six months’ average is at or below the median. If it is, then fantastic! You are poor enough to go on with a Chapter 7 and the United States Trustee’s Office will likely not get involved, making things much easier for everyone.

If the last six months’ average is over median, we go a step further and do “long form” means testing. This is not fun.  In “long form” means testing, in addition to a review of your last six months’ income, we have to look at the last six months’ expenses. Yes, we need to know how you spent every penny during the last six months prior to your bankruptcy petition filing date.

Expenses allowed to be considered to reduce the income on the means test include:

Involuntary paycheck deductions

  • Health insurance
  • Out of pocket medical
  • Daycare
  • Child support
  • School expenses for each child
  • Payments on secured debt that you intend to keep (this is subject to debate across the country, but surrender of the collateral disqualifies that expense being counted on means test here in the Middle District of Florida)
  • Tithing and charitable contributions
  • And so forth.

Additionally, Congress decided that certain expenses would be considered only up to what the “National Local Standards” say they should be. These expenses include rent, power, food, clothing, telecommunication (satellite tv, cable, internet, phone) and transportation. Some national local standards are laughable and others are pretty generous.

After all necessary income and expenses are plugged in, my software gives me either a green smiley face or a yellow frowny face at the bottom indicating whether going through the long form got us under median. Green is good.  Yellow is not good. When I still have yellow after going through long form I still need to ask a few questions before giving up and telling a client they are ineligible for filing a Chapter 7 Bankruptcy. This is because we still have a couple escape hatches in 11 USC 707(b) “special circumstances” and “totality of the circumstances.”

Examples of “Special Circumstances” are given in the Code: “such as a serious medical condition or a call or order to active duty in the Armed Forces… to the extent (they) justify additional expenses or adjustment of current monthly income for which there is no reasonable alternative.”  I concentrate on the second half of that sentence when I ask the client “Is there a necessary and extraordinary expense not already factored in?”  I will tell you now that a child needing braces or getting ready to go to college is not going to fly.  A car on its last leg and the need to replace it has worked for me in the past.

“Totality of the Circumstances” is defined in the Code as “whether the totality of the circumstances of the debtor’s financial situation demonstrates abuse.” This is nice and vague, which gives us more options. Obvious situations that fit would be lost employment, reduction in income that is not expected to recover soon, divorce, recently ordered domestic support (child support or alimony) that was not factored into the means test, as well as the fact that the income calculation might include 401K or retirement draws, or other “nonrecurring income” that is not reasonably expected in the foreseeable future.

It is all so individually specific to each particular client that I hesitate to tell you that something will or will not work in your case. It’s not fair to generalize, but this is a conversation every bankruptcy attorney worth their salt will have with a client who cannot pass the means test but wants to file Chapter 7.

If I see either a special circumstance or a “totality of the circumstances” event, and there is no other good reason to do a Chapter 13, then I will file the case as a Chapter 7, despite the yellow frowny face on my screen. What will happen then is I will get a phone call or email from a paralegal at the United States Trustee’s office about the filing and requesting support for the filing. I will then quickly email to them all the documentation and support I have. The paralegal for the UST will likely come to the creditor’s meeting (about a month after filing) and ask the clients some or a lot of questions about the special circumstances or change in circumstances. They are not being mean, but they have to get those answers recorded so they can justify to their bosses in Washington D.C. why they didn’t throw the book at us.

Filing a Chapter 7 when the presumption of abuse arises because of not passing the means test makes getting through it tougher, but not necessarily impossible.  Another option to seriously consider, and is sometimes necessary, is waiting until the six month average is diluted.