Most practitioners are familiar with the post BAPCPA amendments to eligibility provisions of Chapter 7 commonly referred to as the “means test.” Aside from analyzing the eligibility of the chapter 7 filers, the test is used to determine most debtors’ plan payments for purposes of chapter 13. While the nation’s high court has addressed means test related issues, construction and application of the means test is largely left to the discretion of bankruptcy judges, and as a consequence, far from uniform across jurisdictions.
Applicable to individual debtors whose primary debts are consumer debts, as defined under Section 101(8), the means test assists the trustee and the courts to determine the debtor’s ability to repay debts and by implication, whether a chapter 7 filing is presumptively abusive. If the presumption of abuse arises by application of the means test, certain parties in interest participating in the bankruptcy case may request that the court dismiss the case or allow the debtor to convert the case to one under chapter 13. The test symbolizes one of many amendments comprising of BAPCPA evidencing a Congressional intent to encourage more individual, consumer filers to join the ranks of chapter 13 filers.
There are, however, two notable exceptions to the application of means test in chapter 7 cases for determining whether the filing is presumptively abusive. In particular, the means test does not apply, and a court may not convert or dismiss a case based on any form of means testing, if the debtor is a disabled veteran, as defined under 32 U.S.C. § 101(d)(1), and the indebtedness occurred primarily when the debtor was on active duty or when performing homeland defense activity; or during the 540-day period following a period of at least 90 days of active duty or homeland defense activity, fi the debtor was a Reservist or National Guardsman called to active duty, or to perform homeland defense activity, after September 11, 2001. However, the more commonly relied upon exception is what is colloquially referred to as the “state median test.” To summarize, if the income of the debtor combined with that of his or her spouse is equal to or less than the corresponding median income in the state where the bankruptcy is filed, then no one may move for dismissal pursuant to the means test. See 11 U.S.C. § 707(b)(7).
Median family income is the median income in the state in which the debtor resides for a family of the same or smaller size reported by the Bureau of the Census for the more recent year. See 11 U.S.C. § 101(39A)(A). if not computed or reported for the current year, the most recent year for which it is computed is adjusted to reflect the increase in Consumer Price Index for all urban consumers between the most recent year reported and the current year. See 11 U.S.C. § 101(39A)(B). Up to date current median family income information is available at: http://www.justice.gov/ust/eo/bapcpa/meanstesting.htm.
A debtor’s current monthly income is the debtor’s average monthly income, whether or not taxable, received from all sources for the six-month period ending on the last day of the month preceding the month in which the petition is filed, divided by six. See 11 U.S.C. § 101(10A)(A). This figure determines whether a debtor is above or below the state median income for the debtor’s state of domicile, and therefore, which expense scheme applies. For purposes of chapter 13, this figure is also used to determine the applicable plan commitment period. Income of the debtor and the debtor’s spouse, if a joint case, is calculated on a gross basis – i.e. pretax and before other deductions such as those for Social Security, Medicare, dues, health insurance, etc.[1] The Code itself does not define the term “income,” except that it includes amounts paid by any entity other than the debtor, and the debtor’s spouse, if a joint case, and to exclude certain enumerated items. Consequently, case law shows much variation among the courts as to the scope of income. This variation, in turn, impacts the debtor both from a standpoint of determining whether the individual is over or under the applicable median income and in applying the means test.
For purposes of calculating income, the Code allows the inclusion of operating expenses with the debtor’s other expenses, which are deducted after determining the current monthly income. The official form promulgated by the United States Trustee’s Office, B22C, appears to conflict with the statutory dictate mentioned above by allowing debtor to deduct reasonably necessary operating expenses from gross receipts in calculating currently monthly income. This divergence can be consequential in determining a chapter 13 plan’s applicable commitment period. If currently monthly income were construed to mean “gross” receipts, it is more likely that a self-employed person will exceed the applicable median income and be required to propose a five-year rather than three-year plan.
Earlier this month, the United States Trustee Program announced the latest updates to the program’s Census Bureau’s Median Family Income Data, which will take effect November 1st, 2014. For cases filed under chapters 7 and 13 on or after November 1st of this year, the case or standing trustee will evaluate the abusiveness of the filing or applicable commitment period based on this new set of census data. Overall, the new data favors filers residing in single member households and larger households of four or more individuals; the income threshold for these households have been raised by 3% and 9.5% respectively. As for many households comprising of spouses or domestic partners, and those with a single child, the new thresholds have declined by 1.2% and 4.0% respectively. Additionally, the updated income thresholds also cures the prior anomaly of treating households with one child and without children the same. Although the state median test provides quick access to chapter 7 relief without the burden of means testing, debtors are encouraged to use Forms 22A and 22C for compiling a more realistic picture of current cash flow than what Schedules I and J allows.
[1] Social security benefits and amounts received by victims of war crimes, crimes against humanity or international terrorism are excluded from current monthly income. See, e.g., 42 U.S.C. § 407. In close cases, the majority of litigation has focused on whether and what constitutes a social security benefit, as well as the timing of its receipt by the debtor.