If You Have The Means To Pay, The Means Test May Not Matter

In an effort to curb abusive bankruptcy filings, Congress in 2005 passed BAPCA, the Bankruptcy Abuse Prevention and Consumer Protection Act. BAPCA established what is known by bankruptcy practitioners as the “Means Test.” The means test, through the use of a strict formula that incorporates a debtor’s actual expenses with standard expenses for the area in which the debtor lives, is used to determine whether or not a debtor has the “means” to pay back all or a portion of their debt. If the test determines that a debtor has enough disposable income to pay back debt, the debtor is excluded from Chapter 7 eligibility. If a debtor who does not pass the means test files a chapter 7 bankruptcy, there is a presumption that the filing is abusive and the trustee can move the court to dismiss the case.

But what happens when the debtor passes the means test but still has the means to pay back some debt? Any example of where this situation can occur is when a debtor is receiving a pension and social security. Social security is not included in the means test as income because it has been specifically excluded as a source of income for purposes of the means test by Congress. For a person receiving social security and a pension payment, only the pension amount must be included on the means test. In this situation you can have a person passing the means test on paper, but in reality they may have the means to pay back a portion of their debt, due to their social security income.

Two recent decisions by bankruptcy courts have found that debtors who pass the means test but who do in fact have the means to repay their debt should have their chapter 7 cases dismissed.

In the case, Calhoun v. United States Trustee, 650 F.3d 338 (4th Cir. 2011), the Fourth Circuit Court of Appeals found that even though the debtors passed the means test, their expenses were excessive and that with the reduction of some of these expenses they would have the ability to repay at least a portion of their debt. It should be noted that the debtors in this case had an income level that was twice the amount of the median income for their state. In addition, the debtors had previously been in a debt consolidation program with a monthly repayment amount of $2600.00.

The debtors in Calhoun tried to argue that passing the means test is determinative of the issue of chapter 7 eligibility and that no further inquiry into a debtor’s ability to pay is proper. The court disagreed, and affirmed the bankruptcy courts decision to dismiss the case.

The 11th Circuit Court of Appeals recently considered this same situation and came to a similar conclusion. The 11th Circuit Court of Appeals focused only on the issue of whether it is appropriate for a trustee to look past the means test and consider a debtor’s ability to repay debt. The court decided this question in the affirmative, but declined to decide if a debtor’s ability to repay was enough to have a case dismissed or how much weight should be given to a debtor’s ability to repay when considering dismissal based on abuse. Witcher v. Early (In re Witcher), 702 F.3d 619 (11th Cir. 2012).

The moral of this story is that it is always important to have an attorney who is knowledgeable about the local court culture and can help you determine how close to the line you can walk.

The Law Offices of Melanie Tavare is a debt relief agency. We help people file for bankruptcy relief under the Bankruptcy Code