I’m so used to railing against deliberate campaigns of misinformation about bankruptcy that I forget that there’s a lot of innocent ignorance out there.
Start with “qualifying” for bankruptcy.
A very earnest and ethical financial counselor was telling me about a client of hers trying to find the right moment in time to file bankruptcy.
She was targeting the point in time after the job loss, but before the new business got established. After the severance pay ran out and before the child left for college.
Yet the story involved a home with a mortgage and tax debts.
I couldn’t get my head around why, on those facts, the means test was a bar to filing a Chapter 7.
Til something she said tipped me off. She thought the means test barred families with incomes over the median from Chapter 7.
Wrong, wrong, WRONG.
Only half must take the means test
Median income only determines whether you have to take the means test to qualify for Chapter 7.
- Families with income below the median income in their state automatically are allowed to file.
- Families with income above the median have to take the test. Pass the test, and you are free to file Chapter 7.
In almost 10 years of dealing with the means test, I’d guess less than a dozen of my clients have been kept from filing Chapter 7 by the means test. Median income by state.
The means test is ugly, obscure, time consuming, and still subject to a lot of uncertainty. But if it was designed to keep people out of bankruptcy, it hasn’t worked very well.
What’s on the means test
In broad strokes, the means test looks at your average monthly household income and deducts from it
- some kinds of expenses at the rates provided by the IRS collection standards
- some kinds of expenses in amounts that you actually expect to spend
- the secured debt payments and non dischargeable taxes you will owe in the next 5 years
While some parts of the formula are rigid and disconnected from the reality of day-to-day living, it presents many ways to qualify a family to file bankruptcy.
The cruelest part of the means test is it seems to favor people with big mortgages, car loans, unpaid child support and back taxes. Those debts are all deductible on the means test.
It’s the folks with upper middle class incomes who pay their taxes, rent, and drive paid-for cars that are disadvantaged by the means test.
So where ever the misconception that the means test just looks at gross family income got started, I want it stopped, you hear<g>.
If you’re above median
Being over the median income is not an automatic bar to filing bankruptcy.
It just means you need sophisticated bankruptcy counsel and some additional work to crunch the numbers so that you have a choice about your choice of bankruptcy chapter.
Remember that the supposed purpose of the means test was to funnel consumers into Chapter 13. And most of the Chapter 13 cases we file pay little or nothing to unsecured creditors. The money paid into the plan goes to creditors my clients want to pay, like delinquent mortgages, car loans, and recent taxes.
Not a bad deal.
Image courtesy of photobunny.