The Bankruptcy Means Test: Overcoming the Presumption of Abuse
For many, the term "bankruptcy" is cringe-worthy. Throw in another cringe-inducing word like "abuse," and the result can be downright terrifying. While filing a Chapter 7 case under a cloud of doubt is intimidating, it is not impossible to overcome the "presumption of abuse." The key is knowing how the means test works, and what your options are if you fail it.
History of the Means Test
When Congress decided in 2005 to overhaul the bankruptcy laws, it had been more than 25 years since the bulk of the bankruptcy code had undergone any significant revisions. By 2005, Congress had become concerned that too many people were filing Chapter 7 bankruptcy and discharging debts that they could otherwise afford to pay outright or through a Chapter 13 repayment plan. The overhaul became the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA). Congress built in several provisions that were designed to discourage filers who could still make payments on unsecured debts like medical bills, payday loans, and credit card balances. One of those provisions became what we call "the means test."
The Presumption of Abuse
The means test is a calculation designed to determine if you have any money left over at the end of the month—money that could presumably go toward paying down your unsecured debt. If you do, that's considered "failing" the means test. When that happens, you're expected to either abandon your bankruptcy efforts or file a Chapter 13 repayment plan case instead.
If you decide to go forward with a Chapter 7 case anyway, you are doing so under the "presumption of abuse." The presumption is that you can afford to pay some of your unsecured debt, but you're choosing not to by filing the Chapter 7 case. That, Congress deems, may be an abuse of the bankruptcy system. May is the operative word here—at least at this point in the process.
Account for All of Your Allowable Expenses
People fail the means test for one of two reasons. Either their income is too high, or their expenses are not reasonable and necessary for their family's well-being. To ensure that you don't mistakenly fail the means test, it's important to be extremely thorough and accurate in listing your expenses.
Pay close attention while completing the means test form. You may be surprised at which of your expenses are allowable under BAPCPA. Some unusual allowances include:
- Tuition and other expenses for your child's education if they have to go to a special school that addresses their physical or mental challenges
- Out-of-pocket health care expenses
- Telecommunications services, like call waiting, long-distance calls, or internet service to the extent necessary for the health and welfare of you or your dependents
- Your reasonable and necessary expenses associated with the care of elderly, chronically ill, or disabled family members
- Monthly expenses incurred to maintain the safety of your family under federal laws, such as the Family Violence Prevention and Services Act
- Excessive home energy costs
Accounting for unusual expenses like these may be enough to move someone from the "fail" to the "pass" column.
Filing a Chapter 7 Under a Presumption of Abuse
If the presumption of abuse arises under the means test calculation, you may still file a Chapter 7 case. Even if the means test indicates that you have disposable income that you could use to make a Chapter 13 payment, there may be good reasons for you to continue under Chapter 7. The bankruptcy court has the discretion to allow the case to continue, but it will normally require that you provide a detailed explanation of your special circumstances, along with the documentation to back it up.
If you file a Chapter 7 case after the presumption of abuse arises, your trustee or the U.S. Trustee's office will pay particularly close attention to your case. BAPCPA dictates that, in these scenarios, the filer has the burden of proving they are not abusing the bankruptcy system.
You will outline your special circumstances on the means test form. This is your chance to show that expenses that caused you to fail the means test are, in fact, reasonable and necessary expenses. Some scenarios that commonly create these kinds of special circumstances include:
- Serious medical conditions
- Being called to active military duty
- Recent job loss, income reduction, layoff, or forced retirement
- Expenses for a non-filing spouse, such as credit obligations
- Recent marital separation or divorce
Some courts have also found that student loan payments qualify as a special circumstance. This is up to the courts to decide individually—student loans aren't accounted for on the means test form. While some courts agree that these payments qualify, other courts have reached the opposite conclusion.
If the Court Does Not Agree
If the trustee or the U.S. Trustee's office does not agree with your decision to proceed under Chapter 7, they will file a motion to dismiss your case. The bankruptcy court will then weigh in. If the court sides with the trustee, your case will be dismissed. If it sides with you, you will receive the appropriate Chapter 7 discharge.
If you failed the means test and the bankruptcy court does not agree that you present special circumstances, you still have options. You can allow your case to be dismissed and wait until your financial situation gets worse or otherwise changes in a way that allows you to pass the means test. At that point, you can start the process over from the beginning. Or, instead of allowing the case to be dismissed, you can convert it to a Chapter 13 case. That strategy would help you manage debt through payment plans, rather than getting it discharged outright.
If your income has drastically changed during the six-month look-back period, you may be close to passing the means test, but older income is preventing that for the moment. If that's the case, waiting a few months to refile may be your best strategy. However, keep in mind that a Chapter 13 plan does not necessarily require you to pay 100% of your unsecured debt before you are discharged. You might prefer a Chapter 7, but you have no guarantee that you'll eventually qualify for one, and a Chapter 13 payment plan might be better than going without any relief at all.