Nothing is as simple
as we wish it was. In 2005 our Federal government responded to what some called abuses of the bankruptcy system.
Back then the concern was that debtors who had the “means” to repay some or all of their debts were evading responsibility
by filing bankruptcy, effectively abusing the system and getting relief they didn’t really need. Thus the “Means
Test” was added to the process.
The Means Test, simply put, is a test of income against state averages. If yours is higher than state averages,
you risk “failing” the Test. If you fail it, you may be relegated to a more costly Chapter 13, restructuring
of some or al debt over a lengthy period of time, rather than get a quick, streamlined discharge.
The Means Test did have an impact, apparently. The number of filings
dropped substantially after implementation of the 2005 laws which included the Test.
But a funny thing happened next – the national economy took a nose
dive and suddenly “equity” became little more than a woeful conversation among the nostalgic. Assets became
liabilities and that fun credit-cushion that formerly kept us afloat became a sinker. And bankruptcy, once arguably
an easily abused process for evading responsibility, became an essential debt-to-income balancing tool. Even though
bankruptcy has evolved into a financial necessity, the Means Test is still an intimidating speed-bump and potentially
an obstacle to relief.
The Means
Test is comprised of two parts, the first being a perfunctory look at the numbers. Many, if not most, will pass Part
I of the Means Test, especially those who have taken pay cuts, are unemployed, recently divorced or who are otherwise in trouble
due to diminished cash-flow. But those who don’t pass it will be pushed into Part II. Part II involves a
complex, often time-consuming analysis of qualified expenses, income reducers, national/IRS averages, etc.
Although some gainfully employed debtors (especially
those who are or have been traditionally highly-compensated) may fail the Means Test at Part II, because of the complex application
of adjustments, most who are required to take it will also pass it.
Passing the test prior to filing isn’t the final word, though. The United States Trustee
is charged with monitoring bankruptcy filings for abuse. We have noted that where debtors have sufficient income that
Part II of the Means Test is relevant, the US Trustee tends to challenge the process and engages further analysis, requiring
additional documentation in support of the analysis. This complicates the bankruptcy process, though not necessarily
stopping it. If the Means Test outcome lacks adequate proof, the US Trustee may oppose discharge or seek dismissal of
the bankruptcy petition – both of which will require additional appearances and/or other response.
Especially if you are gainfully employed but in need of bankruptcy relief,
be prepared to document ALL your debts, your assets, your income and all your monthly expenses. And be prepared for
your bankruptcy to be more complicated than some advertisers may lead you to believe. As always, abusing the process
and/or committing fraud is unacceptable, and carries tremendously negative ramifications.
