Means Test: Does Chapter 7 Filer Have Ability to Fund Chapter 13 Plan?
Back when the bankruptcy laws were changed in 2005, a hard calculation was implemented, based on household income and household size, to determine whether or not a bankruptcy filer was making a “decent” living, and should be disqualified from discharging debts completely in Chapter 7 without repayment. This hard calculation has been dubbed The Means Test–i.e., Does the filer have the means available to repay at least a portion of their debts in a Chapter 13 payment plan? If the answer to this fundamental question is “yes”, then filers risk dismissal of their Chapter 7 case for “abuse.”
Passing the Means Test and Still Having Problems
What is perplexing to some prospective Chapter 7 filers is this: You can still “pass” The Means Test, but still run afoul of qualifying for a Chapter 7 bankruptcy case. The converse is also true: You can “fail” The Means Test, but still qualify for a Chapter 7 bankruptcy case. The Means Test is simply a burden-shifting mechanism. If you “pass” The Means Test, then there is a presumption that you qualify for Chapter 7 and anyone that disputes that fact has the burden of proof to demonstrate that you do not qualify. If you “fail” The Means Test, then there is a presumption that you do not qualify for Chapter 7, and now the burden of proof is on you to demonstrate that you do qualify for Chapter 7. In short, The Means Test is not as straight forward as most would like it to be.
Two Time Periods for Analyzing Chapter 7 Income
Income, for the purposes of Chapter 7, is analyzed within TWO different time periods. First, The Means Test measures the total “regular” income received in the six months prior to the Chapter 7 bankruptcy filing and averages that income (less social security types of income). Second, the “present day” income that exists on any given day during the administration of the Chapter 7 bankruptcy case is also taken into account.
Example: You’re Employed Leading Up to Bankruptcy
Example 1: If you have been employed leading up to filing bankruptcy, were making a good wages, were suddenly terminated, and then filed for Chapter 7 right away, there is most likely a “presumption” that you do not qualify for Chapter 7 based on your historical income–i.e., you will “fail” The Means Test. The reality is, though, you do qualify, because, as of the filing of the case, you are unemployed, and you do not have the means available to repay creditors in a Chapter 13 payment plan. So, the “present day” income dictates that you should be able to rebut the presumption that you do not qualify for Chapter 7. In this situation, you simply need to demonstrate to the US Trustee that you are not employed, have no pending prospects of future employment, and you do not have the ability to repay creditors in Chapter 13.
Example: You’ve Been Unemployed for 6 Months
Example 2: You have been unemployed for 6 months, only earning unemployment compensation. You file for bankruptcy and “pass” The Means Test easily. Two weeks after filing, you get a job making $150K a year. On the last day of your Chapter 7 case, the US Trustee files a motion to dismiss your case for abuse. This is a real-life fact pattern. Yes, The Means Test was “passed”, but the “present day” income dictated that my Client had the means available to repay at least a portion of the debt in a Chapter 13 payment plan.
Rob Cohen, the Managing Partner of Cohen & Cohen P.C., is a bankruptcy attorney that practices in Colorado and Wyoming. He serves as a Chapter 7 Bankruptcy Panel Trustee, and has to date administered over 8,000 Chapter 7 bankruptcy estates. Rob is a Certified Consumer Bankruptcy Specialist, and was nominated for Denver Business Journal’s 40 under 40 in both 2014 and 2016.