The Significance of the Means Test in Bankruptcy

By Rachel Sherman

The means test in the bankruptcy context was designed and is currently used to prevent people with high incomes from filing for a Chapter 7 bankruptcy, which wipes out debts altogether. The intent of Congress when initiating the means test was to ensure that people who have a high enough income do pay back their debts under a Chapter 13 plan. Therefore, it is the means test that acts as the gatekeeper to one’s bankruptcy discharge. It is for this reason that a thorough and accurate analysis of a client’s finances be performed, and the only way we can accomplish this is by obtaining all relevant records from the client.

Means testing is not a new concept. The method was used as a screening process during the Great Depression to determine eligibility for government relief programs. In the bankruptcy context, we speak of “the means test,” which is also a screening device. This test was introduced as part of the most recent changes to the bankruptcy laws in October of 2005 (Bankruptcy Abuse Prevention and Consumer Protection Act, or BAPCPA).

The means test has two essential ingredients: income (the last six months of income from all sources, with some limited exceptions) and expenses, which has two components. The first component has been determined by the federal government based upon household size and geographic location, and the second component is specific to each individual case. For both the income and expenses analyses, insufficient documentation can have a serious impact on the disposition of a case. For example, in a Chapter 7 bankruptcy the trustee can demand that a case be converted to a Chapter 13 bankruptcy. In a Chapter 13 bankruptcy, the trustee can demand that your client increase the monthly payments in the Chapter 13 plan.

As with any area of the law, attention to detail and a willingness to take the time to perform a thorough analysis is paramount. It is best to do your homework up front before filing your case so that you can feel confident in advising your clients as to which chapter is appropriate for them.

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