The “Means Test” Tries to Be Objective

Posted by Kevin on January 28, 2019 under Bankruptcy Blog | Comments are off for this article

In a Chapter 7 bankruptcy, the debtor makes no payments and gets to keep her exempt assets.  For a vast majority of debtors, this means they get to keep all their assets.  The average Chapter 7 is completed in about 4 months

Creditors did not like this and lobbied for 20 years for a major overhaul of consumer bankruptcies.  The result was the 2005 revisions to the Bankruptcy Code which was supposed to force more debtors to file under Chapter 13 where monthly payments of 36-60 months are required.  This was accomplished by imposition of the “means test” -supposedly an objective way to decide who qualifies to file a Chapter 7 bankruptcy.

The “Objective” Rule

If you make under the median income for your State based on household size, you pretty much qualify for Chapter 7.  If your income is above median, you must deduct from your income a combination of actual expenses and average local, State and national expenses to come up with your monthly disposable income.

1. 1. If your monthly disposable income is less than $128.33, then you pass the means test and qualify for Chapter 7.
   2. If your monthly disposable income is between $128.33 and $214.17, then you go a step further: multiply that “disposable income” amount by 60, and compare that to the total amount of your regular (not “priority”) unsecured debts. If that multiplied disposable income” amount is less than 25% of those debts, then you still pass the “means test” and qualify for Chapter 7.
   3. If EITHER you can pay 25% or more of those debts, OR if your monthly disposable income is $214.17 or more, then you do NOT pass the means test. With rare exceptions, that means that you cannot file under Chapter 7.

There is not much difference between $128.33 per month and $214.17 per month- about $86 per month.  Just enough for dinner for 2 at a decent restaurant.  But at the low end, you can get through bankruptcy in 4 months and make no payments.  At the high end, you make monthly payments for 3 to 5 years.

So where do these hugely important numbers come from?  The Bankruptcy Code actually refers to those numbers multiplied by 60—$7,700 and $12,850. When the law was originally passed in 2005 these amounts were actually $6,000 and $10,000 (therefore, $100 and $167 monthly), but they have been adjusted for inflation since then.

So where did those original $6,000 and $10,000 amounts come from?

They are basically arbitrary.  Maybe creditor lobbyists or congressional staffers floated the idea.  Who knows?   But, somewhere in the process Congress decided that it needed to use certain numbers, and those are the ones that made it into the legislation. It’s the law, regardless that there doesn’t seem to be any real principled reason for using those amounts.

The Bottom Line

Sensible or not, if your income is under the published median income amount, then you pass the “means test” and can proceed under Chapter 7.   But if you are over the median income amount, then the amount of your monthly disposable income largely determines whether you are able to file a Chapter 7 case.