I Failed the Means Test! Does That Mean I Cannot File Chapter 7?

When the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) became law in October 2005, one of things it did was create a means test.The way it works is that if the average monthly income over the last 6 full months is over median for the debtor's household size, then the means test has to be run. If the means test results show disposable income, then BAPCPA presumes there is abuse. This is stated in 11USC 707(b).

However what many people forget is this is only "presumed abuse". A lot of inexperienced attorneys may tell their client they need to wait to file for chapter 7 bankruptcy or simply state they have no choice but to file chapter 13. BAPCPA provides in 11 USC 707(b)(2)(B) that this presumed abused may be rebutted. It is common in bankruptcy that there is a presumed abused but the Debtor can still rebut it.

Here is how you can tell if you can overcome the presumption.

Whenever I run the means test and the debtor(s) fails the means test, I first compare the income in the means test to the income in schedule I which show their current income. If the means test income is higher, then I question the debtor(s) on what changed. The answer may be that the debtor(s) is no longer working that much overtime.

I had a case recently in the Canton Bankruptcy Court where the debtor was a firefighter and he was trying to pay his debts without having to file for bankruptcy. As a firefighter, he was allowed to take a paid vacation without actually taking vacation. Needless to say that did not work. He still had debt after paying the debts he had with his paid vacation. So the 1 month which had his paid vacation in addition to his regular income inflated his 6 month average and this caused him to fail the means test. He didn't normally ever take a paid vacation while working. He would just take a vacation by not working during his vacation.

Since he failed the means test, the US Trustee filed a presumption of abuse in his case. But the US Trustee declined to pursue the case of presumption of abuse because they understood his inflated income was an aberration. I had explained to the US Trustee that if he would have taken time off from work for his vacation instead of working and taken a paid vacation (which he normally did) then he would have passed the means test and there would have been no presumption of abuse.

So the lesson from this is just because a debtor fails the means test, he may still qualify for a chapter 7. It is up to the attorney to figure out if the presumption of abuse can be rebutted.

Submitted on 12/24/2014