The means test is supposed to be an objective way to decide who qualifies to file a Chapter 7 bankruptcy. So what’s so objective about whether your “monthly disposable income” is less than $117 or more than $195? Sounds pretty arbitrary to me.
Before getting to this step of the means test, let me bring you back to its beginning. I can’t emphasize enough that many, many people qualify for Chapter 7 strictly based on their income. As I explained a few blogs ago, if your income is no more than the published median income for your state and family size, you skip the rest of the means test. You’re presumed to qualify for Chapter 7.
So if and only if your income is more than the median, you take the next step of the means test—deducting expenses from your monthly income. These allowed expenses are based on a terribly complicated set of rules I discussed in my last blog. After deducting these expenses, that leaves you with your “monthly disposable income,” a very important amount.
This brings us to those $117 and $195 “monthly disposable income” amounts mentioned above. And here’s where the “objective” rules get quite arbitrary. Catch this:
1) IF your “monthly disposable income” is $117 or less, then you are presumed not to be abusing the system to be filing a Chapter 7 case. In other words, you’ve passed the means test.
2) IF your “monthly disposable income” is more than $195, then you are presumed to be abusing the system to be filing under Chapter 7.
3) IF your “monthly disposable income” is between $117 and $195, then whether or not you are presumed to be abusing the system depends on one more step. You ARE presumed to be IF you multiply that specific “monthly disposable income” by 60, and the resulting amount is enough to pay at least 25% of your “non-priority unsecured debts.” (Priority debts are a category of special debts like certain taxes, support arrearage, and such.) If that resulting amount pays less than 25% of that set of debts, then you are presumed not to be abusing the system to be filing under Chapter 7.
So where do those critical two numbers—come from? Notice they amount to a difference of only $78 per month between being presumed to be able to file a Chapter 7 case and being presumed not to be able to.
Well, let’s take it a step further. Multiply the monthly amounts of $117 and $195 both by 60 months (the length of a maximum-length Chapter 13 case) and you get close to $7,025 and $11,725, respectively. (These used to be $6,000 and $10,000 when the law passed in 2005, and has been adjusted for inflation. The current amounts are good until April 1, 2013.) The effect of this set of rules is that:
1) if you theoretically CAN’T pay at least $7,025 to your “non-priority unsecured creditors” within 5 years of monthly payments (60 months), than it’s OK for you to be in a Chapter 7 case and write off those creditors;
2) if you theoretically CAN pay $11,725 or more to those creditors within 5 years, than it’s NOT OK for you to be in a Chapter 7 case, and instead you should be in a Chapter 13 case paying your disposable income to those creditors; and
3) if you theoretically can pay somewhere in between those two amounts in 5 years, then whether you should be in a one Chapter or the other turns on whether or not the total to be paid to the creditors would amount to at least 25% of the “non-priority unsecured debts.”
So where do these decisive $117/$195 and $7,025/$11,725 amounts come from? As far as I can tell, they are totally arbitrary. Some creditor lobbyist or Congressional staff person likely just pulled a couple numbers out of his or her head. I can’t see any principled reason to pick those amounts to determine whether a person should or shouldn’t be allowed to file a Chapter 7 case.
Sensible or not (and the means test is anything but!), the law is the law: if your income is over the median then the amount of your monthly disposable income determines whether you are presumed to be abusing the bankruptcy system by filing a Chapter 7 case.
I will finish this series on the means test with one last blog. Because, even if you have too much disposable income resulting in a presumption of abuse, you might STILL be able to stay in Chapter 7 by defeating that presumption through “special circumstances.”