One of the key roadblocks to bankruptcy ushered in by the BAPCPA is the means test, which compares the income of would-be consumer debtors to the median income in the State in which they live. Make more than the “median income” in your State and you (or you and your spouse filing jointly) must enter into a Chapter 13 repayment plan no matter how much Chapter 7 might be called for because your income is overwhelmed by your payment obligations. The new law even says that if a debtor even tries to file Chapter 7 when they make more than the median State income they are presumed to be acting in bad faith and their cases must be converted to a repayment plan or dismissed. In other words: it is fraud.
The critical determination of whether a consumer debtor can file Chapter 7 liquidation or must enter into a Chapter 13 repayment plan all depends on the standards applied by the U.S. Trustee, and as it turns out even they have trouble making up their minds. For example, standards for median income levels have been revised at a fast and furious pace since coming out in 2005. The latest revisions are no exception and you can see them here on the U.S. Trustee’s website.
The flip side of the median income standard is the IRS National Standards for Living Expenses and Local Standards for Transportation, Housing, and Utilities. These are the maximum expenses that can be taken by Chapter 13 debtors to reduce their plan payments. These items will be updated later in the year.
Potential Loophole: Since median income standards have been raised but expense standards have not yet been changed (presumably they will be tightened downward when they change), debtors may be able to take advantage of the lag time and either file Chapter 7 more easily (becuase they can make more and still file liquidate) or make lower plan payments in a Chapter 13 reorganization (becaue they can take a higher monthly expense deduction from their income).
Are you a Debtor, Debtor’s Attorney, or Case Trustee frustrated by the BAPCPA’s confusing standards and often awkward results? You are not alone. Learn more about the new bankruptcy law at M. Hedayat & Associates, P.C. or e-mail me at firstname.lastname@example.org to tell your story. All contacts are confidential.