Chapter 5. Needs Based Bankruptcy or “Means Testing” After reading this chapter, you will be able to:

Discuss means testing in detail Understand why means testing is the centerpiece of the

BAPCPA legislation. Describe how paralegals play a significant role in the means

testing process, by compiling and organizing data and assisting in performing the required calculations.

Describe the various formulas used in making the means testing calculation by discussion of the statute, form, and text examples.

Understand the need to maintain and organize the data used to perform the means testing calculations for a particular debtor.

Needs Based Bankruptcy

The essence of means testing is that if an individual debtor can repay at least 25% of general unsecured debt over a 60-month period with minimum monthly payments of $109.58 ($6,575), or if a debtor can pay $10,950 or more over 60 months without regard to the percentage repaid, then a Chapter 7 petition is subject to dismissal for abuse unless the debtor consents to or voluntarily converts the case to a Chapter 13

Current Monthly Income

11 U.S.C. §707(b)(2)(A) contains the formula that determines when a Chapter 7 debtor’s filing will be presumed an abuse of Chapter 7.

The first element in the formula is the debtor’s current monthly income as defined by §101(10A).

This provision generally defines current monthly income as a debtor’s average monthly income received from all sources in the 180 days prior to filing, without regard to whether or not the income is taxable.

Current monthly income also includes amounts regularly paid by an entity other than the debtor for the household expenses of the debtor or a dependent of the debtor, but does not include Social Security benefits or payments to victims of terrorism.

Practice Pointer

Information important to means testing that changes on a regular basis, such as household median income and allowable expenses as calculated by various IRS collection standards, can be found on the United States Trustee Program website: www.justice.gov/ust.

Deductions

The second step in the formula is to deduct three groups of expenses from the current monthly income. The first group of deductions is the debtor’s

monthly expenses as calculated according to Internal Revenue Service collection guidelines, excluding payments for debts.

The second group of deductions is the debtor’s average monthly payments contractually due to secured creditors during the 60-month period following the petition.

The third group of deductions is the debtor’s expenses for payment of priority claims.

Special Circumstances

A debtor may rebut the presumption that a case is an abuse of Chapter 7 only by demonstrating the existence of ‘‘special circumstances’’ requiring an adjustment to current monthly income.

To establish ‘‘special circumstances,’’ a debtor must itemize each additional expense, provide documentation for each expense, and provide a detailed explanation of the special circumstances making the expense reasonable.

Procedure

The court, the United States Trustee, the trustee, or any party in interest may bring a motion to dismiss a case as an abuse of Chapter 7, if the debtor’s current monthly income exceeds the applicable state median income for a particular debtor.

The United States Trustee is to review the debtor’s schedules and file a statement within ten days after the meeting of creditors, indicating whether the case should be presumed an abuse of Chapter 7.

If the notification indicates that the case is presumed to be an abuse of Chapter 7, then the United States Trustee must either file an appropriate motion within 30 days or a further report indicating the reasons why such a motion would not be appropriate.