The biggest change to bankruptcy law in 2005 was Form
    B-22, otherwise known as the Means Test. This test helps
    determine “Disposable Income”.  Disposable Income is
    an important concept in filing bankruptcy. It simply
    determines whether an individual has any money
    remaining in their budget after paying all necessary living
    expenses. If there is money left over (disposable income),
    then the individual must file a reorganization (probably
    Chapter 13) to pay back creditors. If there is no
    disposable income, then they are qualified to file a
    Chapter 7 and receive a discharge without paying
    creditors back.

    Until October 17, 2005, disposable income was
    determined very simply. A Debtor’s average monthly
    expenses were deducted from their average monthly
    income. If there was anything left over, there was
    disposable income; if not, there was none.

    Apparently, Congress felt this was too simple and was
    allowing too many people to file Chapter 7. The Means
    Test was designed to force more Debtors into a
    reorganization. It has accomplished that with much
    complication and unfair results.
    Recently, in the In Re Nowlin decision, the Fifth Circuit
    Court of Appeals has brought into question the full effect
    of the Means Test in Chapter 13. This decision may lessen
    the bad effects of this horrible test in a Chapter 13 case.
    Until there are more cases explaining how the Nowlin
    case affects the application of the Means Test, we still
    have to deal with it.

    To fully explain the working and effects of the Means
    Test would take a book. A simple overview follows.

    First Step. Determine the last six months average gross
    income from all sources, including bonuses and overtime.
    The unfair aspect of this step occurs when someone,
    through job disruption or illness, is no longer earning that
    average. Whether or not the income average will be
    earned in the future is not taken into account at this stage.
    Compare the average income to the median income for a
    family of your size in your county. See the link below for
    state median standards.


    If the average is at or below the median income, the
    Debtor passes the Means Test and may file either a
    Chapter 7 or Chapter 13. If the income is more than the
    median, proceed to Step Two.

    Step Two. Subtract from this average income not the
    Debtor’s ACTUAL monthly expenses but the Internal
    Revenue Service guidelines for what they think the
    expenses OUGHT to be. This is what catches most
    people. The IRS guidelines discount many of what are
    typically considered necessary living expenses. See link
    below.

    http://www.irs.gov/individuals/article/0,,id=96543,00.html

    The Debtor does receive a deduction for house payments
    and cars, but even then not always the full deduction. For
    instance, if a Debtor has a monthly car payment of $600
    on a balance of $12,000, they only receive a Means Test
    deduction for $200. The deduction is figured on the 60
    months of a Chapter 13 Plan rather than the 20 months
    remaining on the loan.

    Another issue is the repayment of 401k loans. Although
    repayment is allowed in bankruptcy, they are not allowed
    as a deduction on the Chapter 7 Means Test unless they
    are “mandatory” ( this means they are only allowed if you
    will be fired for not paying them). There are many other
    quirks to the test. Eventually, a disposable income is
    determined.

    Step Three. If the disposable income exceeds $110, the
    Debtor must file a Chapter 7; absent very compelling
    extenuating circumstances. If a Chapter 13 is filed, the
    disposable income figure is used to determine not how
    much is paid to the Chapter 13 Trustee, but rather how
    much is paid to unsecured creditors without priority
    (credit cards and other bills without collateral). For
    instance, let’s take a case that needs $1000 per month to
    pay the mortgage, cars, and Chapter 13 Trustee fees. A
    disposable income of $300 means that over and above any
    money needed to pay car loans, mortgage payments and
    taxes, unsecured creditors must be paid $300 x 60 months
    = $18,000. In other words, the Trustee payment must be at
    least $1300 rather than $1000.

    The Means Test is complex and fact-intensive. To prepare
    it correctly requires provable income and expense
    numbers; and the knowledge and experience of a qualified
    attorney.  



    Live south of downtown Houston?

    Call my Friendswood office.

    281-996-9393
JOHN E. SMITH&
ASSOCIATES,P.C.
Helping People With Debt
Since 1983
Bankruptcy
is all  we do.
THE MEANS TEST
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