When the Bankruptcy Code was amended in 2005 to become the “Bankruptcy Abuse and Consumer Protection Act” (BAPCPA), there was a pre-change increase of Chapter 7 filings because of concern over a new provision in the law known as the “Means Test”. Once the law was amended, the means test was and is located on the Form B 122(A), and became part of the petition that must be filed to commence a case. While there was a great deal of speculation on what the means test would entail leading up to passage of the law, what it is now is fairly cut and dry.
In particular, the means test is a six month review of the Debtor – or Debtors – income. All income sources are considered, and weighed against the “National Standard Tables” – tables that are present for every county in the United States by the Internal Revenue Service that represent what the government perceives as an the amount required for various categories. These tables, promulgated for questions involving tax repayment through the Offer in Compromise process, lay out numbers for housing allowances, food, utilities, and various other necessities, such as automobile expenses. Variation exists in the tables based on household size, locality, and on a year by year basis. To place it in practical perspective, the National Standards are not actual expenses of the Debtor or Debtors, but expense amounts the government assumes an average individual in the subject county will have. Further, while expenses may be similar along county lines such as from San Diego County to Orange County, different National Standard numbers may exist.
If a potential Debtor has income that is in excess of the National Standard numbers for the last six months, additional provisions of the form arise, in terms of deductions, and calculations. This is where the means test’s teeth arise, in that under Section 707 of BAPCPA, those individuals who are deemed to be abusive filers can have their case converted to a Chapter 13 – debt repayment plan or worse yet, dismissed in its entirety, which can carry other penalties. These fears lead to the rush of filings in 2005; but as time has gone on, it is clear that this provision for many people is not even applicable. For example, the law specifically exempts disabled veterans from being subject to the test at all.
Moving on from this limited class, the means test is circumscribed by an even larger area of the law – the distinction between “consumer debt” and “non-consumer debt”. The law states that all “consumer debtors” must complete the means test. But, this means that if one’s debt is “non-consumer” debt, one doesn’t have to complete this portion of a Chapter 7 bankruptcy petition. While the law does not lay out all of the distinctions on consumer versus non-consumer debt, various cases have since filled in the gaps. At this point, consumer debt is what it sounds like – credit cards used for personal purchases, automobile loans for personal cars, mortgages on personal residences, along with other items.
In contrast, non-consumer debt are things that are not for personal expenses. For example, a person that is self employed, but has accrued substantial debt related to the business is a non consumer debtor. Going further, if a party has extensive medical bills, this debt is considered non-consumer debt. Finally, if a person has extensive – and dischargeable tax debts – these debts are considered non-consumer as well. Under the law in the Ninth Circuit, where California is, as long as these non-consumer debts are slightly more than the consumer debt, meaning over fifty percent, the means test does not apply, and therefore does not need to be completed.
Even though it may be a relief to not have to fill out the means test portion of the petition, and comply with that part of the law, there are other pitfalls in Chapter 7 cases. If you have questions about Chapter 7 relief, don’t just trust what advice you receive from family and friends, or the internet, but contact an attorney who can guide you between what is real – and what is a dead end. Contact our office today with any Chapter 7 questions you may have.
Financial problems are like the ripples that radiate outward from a rock being thrown into water; rarely are there one; and in general, such ripples disturb all aspects of life. Numerous studies have shown that in 2019, more people are living paycheck to paycheck, and more people are likely to suffer a disruption from unknown financial stresses, whether it is the loss of a job; government shutdowns; medical emergencies; or something else that is unforeseen. When financial problems occur, they rarely are confined to an individual – or couple’s economic status, and generally affect their mental health in a number of ways.
While there is not a one size fits all solution for everyone’s financial problems, and in many cases, financial problems are exacerbated by other factors, there are legal remedies, including that of Title 11 of the United States Code, otherwise known as the Bankruptcy Abuse and Consumer Protection Act (“BAPCPA”), or just the “Bankruptcy Code”. While no one ever sets out to file for bankruptcy protection, the law is designed to allow people a fresh start, and to make much needed changes in their lives without constant financial pressure. And, while not perfect, the law when applied correctly can and does make positive changes in many people’s lives.
Bankruptcy is not a monolithic creature either, with differences arising under Chapters 7, 11, 13, and other subcomponents. Generally, most of the questions involving bankruptcy revolve around Chapter 7 cases, especially after the law was modified in 2005. After the new law was enacted, the main misconception that has arisen is that one can only make “so much” money, and otherwise cannot file for bankruptcy protection. Like many myths, there is a grain of truth herein, in that the new law instituted in many cases what is known as the “means test”, which is a six month look-back of income earned.
This test also utilizes numbers from another portion of the government called the “national standards”, which set forth income amounts for household size based on geographic location. If this sounds somewhat complicated, its because it is somewhat obscure. Having said that, the myth in this regard is that not all Chapter 7 filers must complete the means test. For parties for which a majority of their debt is “non-consumer”, the means test does not apply; a common example of non-consumer debt is tax debt. Finally, for those individuals and couples that do have to complete the means test, there are areas where the means test allows for deductions – for mortgages, cars, and other secured debts, and various other expenses. Rarely is the means test a straightforward application of the national standard to income, which means that in reality, there is no “permanent” number for many potential filers.
The second myth is one that could easily be the first myth, because it pre-dates the new law, in that people think they can pick and choose which debts to list in the bankruptcy petition. Under the law, any potential debtor must accurately list all of their assets – and most importantly, all of their debts, so that the Trustee, and the Court has a complete financial picture of their situation. While it may be tempting to think that one can retain a credit card, for example, in the end, that credit card must be listed along with every other debt one owes. Finally, the last myth is that one cannot retain essential items during a bankruptcy, such as furniture, electronics, or more importantly, vehicles. In reality, personal assets are protected by a complex legal series of statutes (exemptions) to certain limits. Separately, loans and leases and vehicles can be “re-affirmed”, meaning that as long as the Court approves the contract, and the potential Debtor stays current on the payments – the debt passes through the bankruptcy as if it did not exist, allowing the party to keep the vehicle.
Like the complexity of financial issues leading to bankruptcy, the bankruptcy code has many permutations itself. If you’re considering a bankruptcy, don’t just trust what advice you receive from family and friends, or the internet, but contact an attorney who can guide you between what is real – and what is a dead end. Contact our office today with any bankruptcy questions you may have.
Christopher Sunnen, Esq. is a San Diego, CA based attorney specializing in family law and bankruptcy law.