In 2005, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which introduced means testing. Since that time, consumers have had to pass the Chapter 7 means test in order to qualify for a discharge under that chapter. If they fail the means test, the United States Trustee can move to have their case dismissed or converted to a case under Chapter 13. Means testing is a complicated aspect of bankruptcy law, making it important for Chapter 7 debtors to work with a qualified Morris County bankruptcy attorney.
How Does the Means Test Work?
The first part of the Chapter 7 means test calculates a debtor’s “current monthly income” by averaging the gross income received during the preceding six months. Most sources of income are included in the means test, including gambling winnings and gifts. Typically, the only income not required to be included are benefits received under the Social Security Act, tax refunds and loan proceeds.
The debtor’s “current monthly income” is then multiplied by 12 to determine his or her “annualized current monthly income.” If that amount is less than the “applicable median family income” for the debtor’s household size, then the debtor automatically passes the means test. Otherwise, the debtor must complete the next section.
The second part of the Chapter 7 means test looks at expenses. The debtor is able to deduct certain expenses from his or her “current monthly income,” including IRS standards and the debtor’s actual expenditures. After deducting all allowed expenses, the resulting figure is the debtor’s “monthly disposable income.” This figure does not necessarily reflect the debtor’s actual disposable income, one of many problems with the means test.
If the debtor’s “monthly disposable income” exceeds a certain amount, the presumption of abuse arises. Unless the debtor can successfully rebut the presumption of abuse, the bankruptcy court will dismiss or convert the case.
Rebutting the Presumption of Abuse
In some cases, special circumstances may exist that render the means test calculations irrelevant. Some examples include:
- Recent job loss
- Significant reduction in income
- Long term disability leave
- Recent separation or divorce
- Significant increase in allowable expenses
- Large, unavoidable debt payments not included in the means test calculations
Debtors who can demonstrate special circumstances may receive a discharge under Chapter 7 even though they initially fail the means test. The procedure for rebutting the presumption of abuse tends to vary from court to court, but it usually involves providing some sort of documentation in support of the special circumstances, such as:
- Pay stubs showing a reduction in hours or pay
- Unemployment benefits letter
- Termination notice
- Divorce petition
- Lease showing spouses are no longer living together
- Long-term disability benefits statement
- Affidavit outlining the additional expenses the debtor believes should be considered
- Affidavit explaining recent or anticipated changes that directly affect the debtor’s disposable income
A debtor may need to file additional paperwork with the bankruptcy court, provide supporting documentation to the United States Trustee or even attend a hearing. For assistance with all aspects of the Chapter 7 process, including the means test and rebutting the presumption of abuse, contact a qualified Morris County bankruptcy lawyer today.