Part IV of XI
Written by Beckett Cantley and Geoffrey C. Dietrich
This article follows the outline contained in Part I, which can be read at www.cantleydietrich.com.
The means test, found in amended section 707(b)(2) of the Bankruptcy Code, was perhaps the most controversial and noteworthy provision of the BAPCPA. The means test, considered strict and inflexible by many, was established to determine whether a debtor’s Chapter 7 filing is considered a presumptive “abuse” of the bankruptcy system. The decision of whether a filing constituted “abuse” of the bankruptcy system was previously made by a bankruptcy court judge, who could evaluate the particular circumstances that led to filing for bankruptcy, prior to enactment of the BAPCPA. Post-BAPCPA, section 707(b) of the Bankruptcy Code provides two definitions of “abuse." “Abuse” may be found when there is an unrebutted presumption of “abuse” arising under the means test. Section 102(a)(2)(C) of the BAPCPA amended section 707(b) of the Bankruptcy Code to provide that, where the presumption of abuse does not apply or has been rebutted, “abuse” of the Chapter 7 system may nonetheless be established where: 1) the debtor filed the Chapter 7 case in bad faith; or 2) the totality of the circumstances of the debtor's financial situation demonstrates abuse, including whether the debtor wants to reject a personal services contract and the debtor's financial need for such rejection.
Where a Chapter 7 debtor’s income is above the median income of the debtor's state (after the median state income figures are adjusted by family size), the BAPCPA subjects such a debtor to a means test, the failure of which evidences presumptive “abuse.” On the other hand, a debtor whose income is below the median income for such debtor’s state, after family size adjustments, is not subject to the means test, and therefore, absent evidence of bad faith, cannot be said to have “abused” the bankruptcy system.
If a Chapter 7 debtor’s income is above the median income of the debtor’s state, after family size adjustments are accounted for, the means test would be applied. Section 102 of the BAPCPA amended section 707(b) of the Bankruptcy Code to mandate a presumption of abuse if a Chapter 7 debtor's current monthly disposable income (generally found by subtracting certain expenses classified as necessary from gross income), when multiplied by 60, is not less than the lesser of: 1) 25% of the debtor's non-priority unsecured claims, or $6,000 (whichever is greater); or 2) $10,000. In other words, a presumption of abuse shall arise if: 1) a Chapter 7 debtor has at least $182.50 in current monthly disposable income (this equals $10,950 over five years), regardless of the amount of debt; or 2) a Chapter 7 debtor has at least $109.59 of such income (which equals $6,575 over five years) and this sum would be enough to pay general unsecured creditors more than 25% of the outstanding liability owed. If a presumption of abuse is found under the means test, it may only be rebutted in the case of "special circumstances."
Section 102 of the BAPCPA amended section 707(b) of the Bankruptcy Code to permit the court, a trustee, a bankruptcy administrator, or a party in interest to seek conversion of a Chapter 7 case into a Chapter 13 case (with a repayment plan), upon consent of the debtor and a showing of “abuse” of the Chapter 7 system. Section 102 of the BAPCPA also permits the court, a trustee, a bankruptcy administrator, or a party in interest to seek dismissal of a Chapter 7 case, prior to the debtor receiving a discharge of debt, upon a showing of “abuse” of the Chapter 7 system. In contrast, the pre-BAPCPA language of § 707(b) merely permitted the court or the United States trustee to bring a motion to dismiss the case for “substantial abuse” of the Chapter 7 system. Section 102 of the BAPCPA also amended section 707(b) of the Bankruptcy Code to mandate a presumption of “abuse” A conversion from Chapter 7, where liabilities must be satisfied out of the debtor’s existing non-exempt assets, to Chapter 13, where liabilities may be satisfied from the debtor’s existing assets and/or the debtor’s income over the applicable repayment period of up to 5 years, can make a huge difference in the amount ultimately paid by debtors to unsecured creditors in bankruptcy.
The BAPCPA requires that the debtor’s petition include a calculation of income received in the six calendar months prior to filing. This provision of the BAPCPA imposes an effective filing deadline of the last day of the month on filing a petition in its current form without having to re-calculate the six month average to take into consideration the most recent month’s income.
This is the fourth of eleven installments of this article. The entire article may be found at www.cantleydietrich.com.
