Another purported financial professional has confidently and conclusively gotten the bankruptcy means test absolutely dead wrong.
And used that wrong conclusion to steer someone away from bankruptcy.
Mt. St. Helens has nothing on me in terms of venting.
How can financial professionals get this so wrong, more than a decade after the means test was enacted?
Mangling the law
It started off innocently enough when a reader asked financial columnist Jane McNamara on FoxBusiness about the impact of settling an old debt versus filing bankruptcy.
She noted the possible tax consequences of a settlement and asked whether the money was really available to fund the settlement.
So far, so good.
But then she blew it, big time.
To qualify for a Chapter 7 filing in most cases your income must be lower than the median income for your state
Wrong, wrong, wrong.
An income over the median income for your state just means you have to complete the means test. It’s largely another form requiring more figures about your income and your projected expenses.
The means test is another hoop to jump through. It is not a barricade.
The vast majority of above median income debtors pass the means test and successfully file Chapter 7.
In my view, this misstatement is unforgivable. If you hold yourself out to offer financial advice, you at least should have mastered the basics.
Then you wonder about the independence of the piece when you note a connection to creditcards.com. Who benefits if cardholders don’t file bankruptcy? Card issuers.
Bankruptcy means test in the real world
The man in my office recently made me worry about the means test.
Because passing the means test often relies on deducting certain living expenses from their income such as payments on back taxes and secured debts, this man appeared exposed.
His car was paid for, he had no dependents, he rented, paid his taxes, and had no toys bought on credit. All of the usual deductions that get people with high incomes through the means test and into bankruptcy were missing.
But it didn’t matter.
Even with an annual income of $7000 above the median California income for a single person, he qualified for Chapter 7, just based on the standard expense allowances provided for in the means test. In fact, he qualified with $650 a month cushion.
The means test wasn’t even close to knocking him out of bankruptcy.
He’s living proof that McNamara’s statement that you have to have a below median income to file bankruptcy is just plain wrong.
Just because someone wrote it
The internet is marvelous for making information easily available. But just because it’s in print, it isn’t necessarily correct.
Unfortunately, lots of people will read the FoxBusiness article and conclude that they aren’t eligible for bankruptcy.
They’ll struggle on unnecessarily at financial and personal cost because some writer got it wrong, and they believed.
You can read more about how the means test in bankruptcy really works here:
- How the means test works
- Above median income families and the means test
- Tale of terror caused by bad bankruptcy advice
- 3 Steps to a Fresh Start