The bankruptcy means test, now ten years old, is too frequently seen as a hurdle to completing bankruptcy. Yes, it’s messy, creates paperwork, and probably increases the need to hire a New York bankruptcy lawyer when one might not have been necessary. However, most debtors in chapter 7 don’t need to take the means test because their incomes are below the state’s median family income. Additionally, even when debtors’ incomes are above the median, their cases might still clear the abusiveness presumption after accounting for deductions and special circumstances, which I recently listed here.
However, a bankruptcy court might still determine that debtors who meet all these conditions are abusing chapter 7 bankruptcy. The Bankruptcy Code lays out in section 707(b)(3) the two conditions in which a bankruptcy court might do so.
(1) The debtor files the petition in bad faith.
(2) The “totality of the circumstances” of the debtor’s financial situation “demonstrates abuse.”
The Bankruptcy Code doesn’t define these terms, leaving more room for trustees and creditors to file motions with the bankruptcy court asking it to dismiss a case. That having been said, “bad faith” and “totality of the circumstances” pretty clearly rope in situations created by debtors whom bankruptcy lawyers will avoid representing, e.g. deducting generous retirement benefits from the means test that could otherwise pay the debts. These circumstances tend to include debtors who were better off filing in chapter 13 to begin with.
Thus, debtors should keep a few things in mind about the chapter 7 means test. One, most debtors don’t need to take it, but their cases might be dismissed for other reasons, e.g. fraud. Two, those who do take the means test tend to pass it, but not everyone who passes it gets to stay in chapter 7.
Generally, failing chapter 7’s “bad faith” and “totality of the circumstances” requirements is not something most debtors need to worry about. More often than not, this part of the Bankruptcy Code is used against self-represented debtors rather than those with counsel. Consequently, if you have a borderline case, it’s better to discuss it with an experienced New York bankruptcy lawyer than strike out on your own.
For answers to more questions about bankruptcy, the means test, the automatic stay, effective strategies for dealing with foreclosure, and protecting your assets in bankruptcy please feel free to contact experienced fair debt collection practices act Bruce Weiner for a free initial consultation.
