MEANS TEST NOT CONCLUSIVE ON DEBTOR ABILITY TO PAY

The means test is a relatively new standard to ferret out debtor abuse of bankruptcy law. The new bankruptcy law which took effect in 2005 provides that every bankruptcy debtor must compute his gross and net income using IRS allowed deductions for expenses to arrive at disposable income for Chapter 7 or Chapter 13 eligibility. Depending on the outcome, a red flag is raised if a “Presumption of Abuse” in the case is warranted. But the presumption of abuse or the reverse, the presumption that there is no abuse is by no means conclusive. These presumptions are rebuttable. Because IRS deductions are used, the means test may show that there is no disposable income in contrast to the Schedule I and J, actual income and expense, which may show that there is disposable income. For instance an above median debtor who is frugal may actually show based on his I and J schedules that he has the ability to repay 30% of his unsecured debt of $50,000, or $15,000 over 60 months. But the very same debtor may show in his means test that he has zero disposable income. The means test shows no ability to repay debt while the schedules show some ability to repay debt. This could mean the difference between qualifying for a Chapter 13 if we were to go with the I and J schedules, or a Chapter 7 if we were to go with the means test. Hence, this difference in the existence of disposable income presents a problem in some cases. Debtor may argue that he qualifies for a Chapter 7 because the means test is conclusive on ability to pay while the trustee may argue that debtor is abusing bankruptcy law because he actually has the ability to repay a portion of his debt. Who is correct?

 In Re Calhoun, debtors, Mr. & Mrs. Calhoun filed a Chapter 7 petition in 2008. Debtor retired from his job as a hospital CFO eleven years before he filed for bankruptcy relief. Their monthly income was $7,313 from two retirement plans, and $1,459 in social security. They lived on a 3.5 acre property that they tried to sell in 2000 unsuccessfully for two years. Because they could not sell the house, they spent $130,000 in home improvements. Before filing for bankruptcy, debtors entered into a payment plan with a credit management company paying $2,638 each month to their creditors. They made the monthly payments for 22 months, but decided to stop payments because the budget they adopted used all of their disposable income and they could not cover emergencies. They still owed $106,707 in unsecured debt when they filed for bankruptcy.

According to the means test, debtors had no disposable income. The bankruptcy court concluded that it would be an abuse of Chapter 7 to grant a discharge to debtors based on the totality of circumstances. In reaching this conclusion, the court found the “totality of the circumstances” test used in Green v. Staples (1991) to be helpful even though the statutory underpinnings of Green were no longer present. The Green factors are:

 1. Was bankruptcy relief sought after the debtor experienced a sudden illness, calamity, disability, or unemployment?
2. Did the debtor incur cash advances and make consumer purchases far in excess of his ability to repay?
3. Is the debtor’s budget excessive or unreasonable?
4. Do the bankruptcy schedules and statements reasonably and accurately reflect the debtor’s true financial condition?
5. Was the petition filed in good faith?

Debtors objected to the dismissal of their case based on their ability to pay. On appeal, they asserted that Green prohibits a dismissal on that ground alone. They also argued that the means test is conclusive on the eligibility for Chapter 7 relief.

The 4th Circuit said that “We can readily dispense with the last argument… The means test is not conclusive, the presumption is rebuttable, and a court may still find abuse even if there is no presumption…”

 Lawrence Bautista Yang is a graduate of Georgetown University Law Center and has been in law practice for thirty+ years. He specializes in bankruptcy, business and civil litigation and has handled more than four thousand successful bankruptcy cases in California. He speaks Mandarin & Fujien and looks forward to discussing your case with you personally. Please call Angie, Barbara or Jess at (626) 284-1142 for an appointment at 1000 S Fremont Ave Bldg A-1 Suite 1125 Unit 58 Alhambra, CA 91803.