Income and Expenses: 11 U.S.C. Sec. 707(b) Objections – The New Means Test

Remember: to decide whether to file bankruptcy, there are three questions that your attorney must be able to help you answer:

  1. Can I discharge the debts I want to eliminate?
  2. Will I lose any of my property to the Bankruptcy Court?
  3. Am I making too much money to file Chapter 7?

This section helps explain the final question. This is probably the most complicated of all the changes that the 2005 bankruptcy reform legislation made and so I will try to walk you through it in a short, abbreviated form. Here’s the gist of it: if you make too much money, you may not be permitted to file Chapter 7.

The Old Rule before October 17, 2005

In Chapter 7, the Bankruptcy Court could deny a discharge to a consumer debtor when the discharge would result in substantial abuse of the Bankruptcy Code. 11 U.S.C. Sec. 707(b). Substantial abuse existed in Chapter 7 when a debtor could file Chapter 13 and pay a significant portion his or her general, unsecured debts. Cases that originally examined 707(b) focused on what percentage of debt could be repaid in Chapter 13 over three to five years. These cases suggested a bright line test that attorneys could follow. For example, if you could afford to pay 89% of your general, unsecured debts in Chapter 13 over three years, the Eighth Circuit held that permitting a Chapter 7 was substantial abuse of the Bankruptcy Code. The sheer amount of money a debtor can pay in Chapter 13 on a monthly basis could also be considered grounds for denying a Chapter 7 discharge, regardless of the actual percentage that could be paid to creditors. A Bankruptcy Court in Nebraska found that the ability to repay a substantial amount of money in Chapter 13 may demonstrate substantial abuse in Chapter 7, irregardless of the percentage that would actually be paid in Chapter 13. In re Schmidt, 200 B.R. 36 (Bankr D. Neb. 1996). This rule only applies to consumer debts. If the majority of your debts come from business debts, back taxes, back child support or debts from an auto accident, the test does not even apply to you. However, consumer debts typically include medical debts, credit cards, personal loans for cars and houses, and even debts for student loans. Given how much money most people owe on their homes, it is likely that the majority of most people’s debts are consumer debts. Still, the biggest problem for Congress was that courts arrived at different conclusions using different standards. Congress wanted one, uniform standard for everyone.

The New Amended Sec. 707(b): Abuse vs. Substantial Abuse

As of October 17, 2005, a Chapter 7 bankruptcy can be dismissed under two tests, depending on whether your income is above or below the State Median Income for your state. First, for those who earn less than the State Median Income, a Chapter 7 case can be dismissed for bad faith determined under the totality of the circumstances. Sec. 707(b)(3), as amended. This is identical to the original test discussed, above. Second, a new means test has been created for debtors whose income is above the State Median Income for their state. This is a strict test in which a debtor will be denied relief under Chapter 7 if the debtor can file Chapter 13 and pay as little as a hundred dollars a month to the general, unsecured creditors. Please note: The Median Income test does not apply to a debtor who is a disabled veteran whose debts were incurred primarily on active duty or while performing homeland defense. 11 U.S.C. Sec. 707(b)(2)(D), as amended. As indicated, earlier, it also does not apply, if the majority of your debts are not consumer debts.

Part I: Determine Whether Your Income is Above or Below the State Median Income.

  1. Determine which state you have lived in, for the greater part of the past 180 days. That’s the state’s Median Income you must apply.
  2. Determine your state’s Median Income. The U.S. Census Bureau calculates median income by state, depending on the number of people in your household. The U.S. Trustee’s office has provided a table that shows these figures.

For our purposes, here is a break down of the Iowa and Illinois tables:

 1 Person Earner2 Person Family3 Person Family4 Person Family
Iowa$36,518$48,095$5,5933$64,051
Illinois$43,012$53,320$64,286$72,742

If you have more than four people in your family, add $6,300 per year for each additional person to the 4-person family figure to arrive at your State Median Income. How many people can you count that are in your family in determining household size? For most people, this is easy: the debtors and their children. But the new rules also allow you to include blood relatives living in your home and even some relatives not living with you that you pay the majority of their bills for. For example, if you have an elderly parent or grandparent that you support, outside your home, that individual may be counted to increase your family size. Proof of your support will likely be required.

  1. Determine your current monthly income.

To do this, Congress now requires me as an attorney to look at your pay stubs for the past six months and create an average monthly income. I will need your pay stubs from that time period or a print-out from your employer. If you are self-employed, I am probably going to need a profit and loss statement for each of those months. I also will need to know about any other income you received such as unemployment or income child support or from the sale of a house, or a car, or stocks. Not all of these amounts may be included in our calculations, but I will need to review it to determine what is and what is not included. Social Security income (such as SSD or SSI) is normally not included in this calculation, but I will need to know about it, anyway. It is taken into account in determining your overall income and expenses. Which months are relevant? Well, you count the past six months that came before the current month you are in. For example, if it is July 15th, you count January, February, March, April, May and June.

  1. Multiply the dollar figure from Step Three by 12 to determine the your annual income for purposes of this test.
  2. Compare your annual income from Step Four with the applicable State Median Income for a household the same size as yours. If your income is less than the Median Income for the applicable State, STOP and GO BACK to the original Substantial Abuse test now found in 11 U.S.C. Sec. 707(b)(3), as amended. For those clients above the Median Income, continue on:

Part II: Determining Your Allowable Expenses.

If your head is spinning, by now, this is a good thing. Take aspirin and continue on. Or, go to another page on my website. This stuff is WAY too complicated and the good news is that it’s about to get 10 times more complicated, if you think your income is above the median income. This is why you need an attorney. This is why your initial consultation is FREE. This is why you should call me at (309)788-3799 to schedule your appointment.

Now we continue on.

There are two reasons why Congress was unhappy with the former Sec. 707(b). First, some jurisdictions ignored the concept that the ability to repay a substantial portion of debt in Chapter 13 was grounds for dismissal of a Chapter 7 bankruptcy. Second, bankruptcy courts in different jurisdictions used different standard expenses that varied widely from jurisdiction to jurisdiction. To correct this situation, Congress worked to develop a consistent, coherent standard. From income, first deduct normal living expenses. Congress permits as maximum expenses the standard expenses the IRS uses in negotiating offers in compromise of overdue tax debts with delinquent taxpayers. There are National Standards for food, clothing, personal care and entertainment, depending on the taxpayer’s family size, and there are Local Standards for transportation and housing. The national standards can be found here.

Transportation Expenses and Housing Expenses

Next, you can deduct expenses for transportation and housing. The U.S. Trustee’s website can help you determine these expenses for the place in which you live.

Second, deduct the actual expenses of the debtor in categories recognized by the IRS, but for which no specific allowance has been specified. These include reasonably necessary health insurance, disability insurance, and health savings account expenses. Sec. 707(b)(2)(A)(ii)(I), as amended. This may include mandatory pensions and repayment of loans from pensions.

Third, deduct expenses for protection from family violence.

Fourth, deduct expenses that are reasonable and necessary for the care and support of an elderly, chronically ill, or disabled household member or member of the debtor’s immediate family. This includes parents, grandparents, siblings, children and grandchildren of the debtor, the dependents of the debtor, and the spouse of the debtor in a joint case who is not a dependent who is unable to pay for these expenses. Sec. 707(b)(2)(A)(ii)(II), as amended.

Fifth, deduct the actual expense of administering a Chapter 13 Plan. This is approximately 10%, the trustee’s fee, and it should include attorney fees for a Chapter 13 attorney. Sec. 707(b)(A)(ii)(III), as amended.

Sixth, deduct the cost of private, public or parochial school expenses for grade school and high school up to $1,500 per child per year. Sec. 707(b)(A)(ii)(IV), as amended. This does not include pre-school.

Seventh, deduct additional home energy costs, if you can provide evidence that the cost you pay for home energy exceeds national standards. Sec. 707(b)(A)(ii)(V), as amended.

Eighth, take secured debt that will become due during the life of a five-year plan, divide by 60 and list this as an expense. Sec. 707(b)(A)(iii), as amended. This is where the car payment and the house payment come back in. If you’re purchasing a home that is not going to be paid off during a five-year Chapter 13 plan, simply calculate the normal payment. Example: If the debtor owes money on a car that will be paid off in three years, the debtor would take the payments owing, divide by 60 and add this as an expenditure.

Ninth, take all of the priority debts listed on Schedule E (back child support, recent back taxes, etc.), divide them by 60 and add this amount to the budget. Sec. 707(b)(A)(iv), as amended.

Tenth, deduct all contributions to tax-exempt charities up to 15% of the gross income of the debtor. Sec. 707(b)(1), as amended.

Part III: Determine How Much Excess Income an Above-the-State-Median-Income Client Can Pay.

There are two trigger points that set off a presumption of abuse in Sec. 707(b)(2)(A)(i). I’ll let Judge Wedoff explain: “(1) if the debtor has at least $166.67 in current monthly income available after the allowed deductions ($10,000 for five years), abuse is presumed regardless of the amount of the debtor’s general unsecured debt, and (2) if the debtor has at least $100 of such income ($6,000 for five years), abuse is presumed if the income is sufficient to pay at least 25% of the debtor’s general unsecured debt over five years. The impact of these trigger points can again be shown in a table:

Current monthly income after defined deductionsPresumption of Abuse
Less than $100Does Not Arise
$100Arises unless debt
exceeds $24,000
$150Arises unless debt
exceeds $36,000
$166.66Arises unless debt
exceeds $39,998.40
More Than $166.66Always arises

Understand that the means test for individuals with income above the Median Income for the applicable State is a REBUTTABLE presumption. Special circumstances may prevent a finding of abuse including the impending loss of a job. 11 U.S.C. Sec. 707(b)(2)(B), as amended. Standing.

Who can bring the Motion to Dismiss a Chapter 7?

Under the old rule, only the court, or the U.S. trustee could bring a Motion to Dismiss for substantial abuse. Under the new rule, if the debtor’s income is above the Median State Income, any party in interest can bring the motion, including a creditor. Sec. 707(b)(1) and (b)(6), as amended.

If a client’s income is below the Median Income, the old rule applies.

What does all of this mean for you? You NEED TO GET A LAWYER! Heck, I’m going to tell you right now that there are a lot of lawyers who are befuddled by this new, complicated calculation. Please try to find someone who files bankruptcy on a regular basis. Again, that number is (309)788-3799.

If you just lost a well-paying job, you may have to either wait to file bankruptcy, or plead to the Bankruptcy Court that your current monthly income is now no longer relevant because you are not making nearly what you were making over the past six months.

If you are thinking about filing bankruptcy, you may want to look at delaying any actions that will artificially pump up your income like selling a car, or a house or cashing in an IRA. Congress really made this complicated because they thought that everyone was cheating and lieing when they said they were too poor to repay their debts. It is my considered opinion that, some day, Congress will find out they were wrong.