When Congress enacted the new bankruptcy law in October of 2005, they created a Means Test, which was designed to determine (in most cases) which Chapter of bankruptcy an individual or couple qualifies for. Because there are many variations on how people receive income, and the types of income they receive, the Means Test was left open to interpretation in many areas, which has created confusion among judges, trustees and attorneys, and which has promoted litigation and opinions to try to resolve some of the ambiguities and/or inconsistencies.
The Means Test was designed to predict a debtor’s ability to pay back some or all of their debt over a period of time (usually three to five years). If the Means Test shows no available income (after allowed expenses), a debtor has a good chance to qualify for Chapter 7. If some of the debt could be paid back (depending on the amount), a debtor might be steered toward a Chapter 13 filing. The Means Test uses the six-month period of time just before the month of the filing date to determine future ability to pay. That formula does not take into account recent changes in income. Thus, a Means Test can be misleading in terms of indicating what a debtor is likely to earn going forward, because it may not be the same as what happened in the past six months.
Complicating matters further, the Means Test requires debtors to list virtually any income they receive, including Unemployment income (in most districts), and assistance from family members received on a regular basis. Gambling winnings (which are far from predictable) are also included, as well as one-time cash gifts. A few exceptions were included that Congress chose not to count. Those include Social Security payments, loan proceeds and tax refunds.
Among the types of income that count in a Means Test calculation, judges have created some exceptions. However, since judges in one district do not have to follow decisions from another district, there are inconsistencies as to the application of the Means Test in different parts of the country. Either the Supreme Court (through decisions), or Congress (through amendments to the bankruptcy law), will have to resolve the ambiguity over what is included on a bankruptcy Means Test.
It is important to consult with an attorney to make sure you qualify for the Chapter you want to file before filing the case.
For more information or a consultation, please call 661-210-5657, or e-mail mjf4bk@ca.rr.com .