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When The Means Test Is Meaningless

By Cathy Moran, Esq. Filed Under: Means test

bankruptcy means test

A local bankruptcy attorney stumbled over the most basic part of the  means test.

Just this week…  nearly 15 years after the bankruptcy “reform” act of 2005.

I thought we were several years past bankruptcy attorneys  clueless about the means test. But apparently not.

When the means test doesn’t apply

This fine fellow told a couple that they couldn’t file Chapter 7 because they had $3000 of disposable income per month.  Their case would be an abuse of Chapter 7, under the law.

Only he never apparently considered whether their debts were “primarily consumer debts”.

He forgot the gotcha baked into the means test:  it only applies to ***consumers.***

Only consumers have to prove they are worthy of the Chapter 7 discharge.

Folks with primarily business debts or, drumroll, taxes, aren’t subject to the means test.

So, lots of disposable income is not a bar to Chapter 7 when the debts are primarily taxes.

Let’s review.

Who takes the means test

So, just why are some above median income families not subject to the means test?

Bankruptcy Code § 707 allows a judge to dismiss a Chapter 7 case  filed by an individual debtor under this chapter whose debts are primarily consumer debts …. if it finds that the granting of relief would be an abuse of the provisions of this chapter.

How a court decides if a filing is an abuse is through the means test.

But, only a case where the debts are “primarily consumer debts” is subject to dismissal for flunking the means test.

What is consumer debt

The Bankruptcy Code defines consumer debt:

 The term “consumer debt” means debt incurred by an individual primarily for a personal, family, or household purpose. § 101(8)

So, the gating question is:  why was the debt “incurred?”

Tort damages aren’t consumer debts either

Obviously, business debt was not incurred for a household purpose.

The core idea is that taxes are not “incurred” by choice, say the cases;  taxes are imposed by government.  And therefor, not a consumer debt.

And the 2005 Congress only hated consumers, not failed business folk, or those who don’t pay their taxes.  End of rant.

So, if the total of taxes (and other, non-consumer debt) is greater than the balance of the other debt a person owes, their debt is not “primarily” consumer debt.

And the means test ONLY applies to debtors whose debts are primarily consumer debts.

Lots of income no bar to filing

The couple who were told that they couldn’t file Chapter 7 because of their generous income, in fact, can file Chapter 7 because their debt is overwhelmingly back taxes.

It doesn’t matter that most of their taxes are so old that the tax is dischargeable.  If it’s tax, it isn’t consumer debt.

Sort the debt between consumer debt and non consumer debt.  When the non consumer debt is larger, check the box on Form 122A-1 Supp, and move on.

More on the means test

Business income and the means test

Four glaring means test mistakes

Torts detour around the means test

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  • Win Now, Wreck Later: A Tale of Bankruptcy and Mortgage ServicingWin Now, Wreck Later: A Tale of Bankruptcy and Mortgage Servicing
  • The Means Test:  The Clunker AllowanceThe Means Test: The Clunker Allowance
  • When It Doesn’t Add UpWhen It Doesn’t Add Up

Filed Under: Means test Tagged With: 2019, means test

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