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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.

《楊清泉律師專欄》MEANS TEST NOT CONCLUSIVE ON DEBTOR ABILITY TO PAY(PART II)