Written by Lexington/Columbia Bankruptcy Lawyer, Lex A. Rogerson, Jr.
If you “fail” the mean test, this results in a presumption of abuse. You still may be able to file Chapter 7, but trying to do so becomes a little more complicated.
The bottom line of the means test is a dollar figure we call disposable income. It’s the difference between our client’s household income (based on the last 6 months) and expenses (based on a hybrid of fixed allowances and actual expenses incurred). If the figure is either negative (a deficit) or a surplus of less than $118 per month, no presumption arises. If the figure is $195 or more, it is presumed that a Chapter 7 would be abusive. If the figure is in between, abuse is presumed if the monthly disposable income, extended over five years, would pay 25% or more of the client’s unsecured debt.
If the presumption arises, there are two kinds of situations where the client might still receive a Chapter 7 discharge. First, the Bankruptcy Code itself allows for a few special circumstances that can rebut, or overcome, the presumption of abuse.
The examples stated in the law are serious illness and military service, and there certainly could be others. For example, the courts are about evenly divided whether the need to repay a non-dischargeable student loan is a special circumstance. But all agree that any circumstance the debtor asserts must cause increased expenses or decreased income, and the client must not have any reasonable alternative about the change occurring.
Second, there can be factors that may not strictly fit the mold of special circumstances but that, practically speaking, make a finding of abuse unlikely. The classic is unemployment. If a couple had good income for most of the last six months, but one of them has been out of work for a good while, it would be surprising to see the US Trustee move to dismiss their case.
If the court ultimately finds it would be abusive for the debtors to remain in chapter 7, they have two alternatives. They can convert to Chapter 13 and pay as much as possible toward their debts, usually for five years, or they can allow the case to be dismissed. Fortunately, our clients so far have avoided being faced with that choice.
When figuring the likely outcome of an abuse issues like these, it’s often as important to know the behavior of the various actors involved as it is to know the law. For this reason, you should select a bankruptcy lawyer that is not only book-smart but concentrates on bankruptcy law sufficiently to be experienced in the trenches.
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Many consumers just don’t understand the means test and why it is in place. I remember before the code changed, so long as your expenses exceeded your income consumers would file chapter 7 cases, who could easily afford a plan payment with some budget cutting. The problem I see as a consumer bankruptcy attorney is that many individuals believe they should be able to spend what ever they want and still file, that is just not the case any longer.
Michael,
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